Compulsory purchase and compensation

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 1 October 2004


(2004), "Compulsory purchase and compensation", Journal of Property Investment & Finance, Vol. 22 No. 5.



Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

Compulsory purchase and compensation

Compulsory purchase and compensation


In recent years, these briefings on compulsory purchase and compensation have concentrated mainly on the proposed review of the compensation code. This process is ongoing, and in December 2003 the Law Commission published its final report on the proposed compensation revisions. A second report on the procedural changes is due to be published during 2004.

In this briefing, I propose to comment on the main changes in the final report on compensation, compared to the Law Commission's consultative report published in July 2002. I then consider a complex and important Lands Tribunal case concerning the compulsory purchase of a bus station, and one or two other cases which, whilst concerning claims of less significance, nevertheless raise interesting points.

Law Commission final report – towards a compulsory purchase code: (1) compensation

The final report of the Law Commission on proposed alterations to the compensation code follows very much along the lines of the consultation document which was considered in detail during last year's briefing. It does, however, take on board a number of the points raised as a result of the consultation exercise.

Disregarding the scheme

One of the main concerns with the consultation document which I expressed last year, concerned the definition of “the scheme underlying the acquisition”. The Law Commission considered this to be the most difficult question which it had to tackle. It is well established that the scheme underlying the acquisition should be left out of account in assessing compensation for compulsory purchase purposes. There have, however, been many Lands Tribunal cases concerning what “the scheme” actually comprises in any particular case, and it has been very difficult to ascertain any pattern from their decisions. In its consultation document the Law Commission proposed to simplify matters by defining the scheme as whatever takes place on land within the same compulsory purchase order as the subject property, unless the acquiring authority define the scheme as being something larger at the time the CPO was made. This would be fine, except that public works schemes are generally detrimental to value. A narrow definition of the scheme will generally suit the acquiring authority, which will be able to take into account in its valuations, works which take place outside the CPO area, which the claimant may consider to be part of the wider scheme.

In its final report, the Law Commission takes a small step towards meeting this potential problem. The “scheme” will no longer be defined absolutely by what takes place on the CPO land. There will remain a presumption that the CPO land defines the scheme, but this will become rebuttable, if the claimant wishes to argue before the acquiring authority or the Lands Tribunal, that it is something larger.

The final report also makes it clear that in disregarding the scheme, it is to be assumed that the scheme was cancelled just before valuation date, rather than having never been thought of, as has been argued in the past. This latter approach has caused problems in the past when valuing, for example, strips of land which have been reserved for future road widening and eventually acquired many years later. Although, by the valuation date, these strips may be useless areas of paving between the road and a well-established office building, it has been argued that they should be treated as good quality office development land, on the grounds that this is what they were many years ago, before the remainder of the site was developed.

Injurious affection where no land is taken

In its final report, the Law Commission clarifies its position on compensation for injurious affection where no land is taken, which appeared somewhat confused in its consultation document. It makes clear that it proposes to merge section 10 of the 1965 Act (compensation arising from the execution of public works) into Part I of the Land Compensation Act 1973 (compensation arising from the use of public works). Where no land is taken, there will be one provision providing compensation for depreciation caused by public works, regardless of whether by use or by construction, and it will not be subject to a rateable value limit as at present. In its consultation document, the Law Commission left open the question of whether the compensation would be limited to depreciation in value, or would include consequential losses, such as loss of profits. It has now concluded that a compensation should, indeed, include consequential losses.

The Red Book does not apply to valuations for compulsory purchase compensation. A new method of valuation is invented for a bus station. The value for money principle is applied to increased rent. Expert witness criticised.

The case of Yorkshire Traction Co. Ltd (YTC) vs South Yorkshire Passenger Transport Executive (PTE) (2002) was a long and complex case concerning the compensation to be paid to YTC with respect to the compulsory purchase of the south bus station in Barnsley. The subject premises were one of the three bus stations standing immediately adjacent to Barnsley railway station, the entire complex being known as the Barnsley interchange. With the demolition of the south bus station, which is owned by YTC, services were relocated to the adjacent bus stations, owned by the PTE, which were extended and upgraded.

Value of the land taken

The first part of the claim related to the compensation payable in respect of the land taken. The absence of comparable evidence of the sale of bus stations caused a problem for the surveyors acting for both parties. Both considered assessing compensation on the basis of Rule 5 of Section 5 of a 1961 Land Compensation Act (equivalent reinstatement) but rejected this, as there was no bonafide intention to reinstate the bus station. It seems likely that it could also have been rejected on the grounds that the premises were not “devoted to a purpose”. It was therefore, necessary to assess market value in accordance with Rule 2.

The acquiring authority decided that the most appropriate method of valuation would be the contractors test, or depreciated replacement cost (DRC), basis. It therefore, produced a valuation based on the cost of acquiring a replacement site, plus the amount of money actually spent on upgrading the adjacent bus stations, besides some allowance for age and obsolescence of the existing buildings. It relied on the Red Book (the guidance notes produced by the “Royal Institution of Chartered Surveyors”) as the authority for using this method of valuation. It claimed that the Red Book advocates the use of the DRC method where there is no market evidence, as in this case. The Lands Tribunal rejected this approach and the member first made the, perhaps surprising, comment that “I think it unlikely that the Red Book has any part to play in the valuation of land acquired on compulsory purchase”. It urged valuers “engaged in the assessment of compensation to look first at the statutory compensation provisions and the substantial body of case law, and only to have recourse to the Red Book to fill any gaps in compensation law and practice”. The specific reasons for rejecting the DRC approach were twofold. First, the correct basis under Rule 2 is market value, whereas the DRC approach is based on cost. The member commented that “it is a truism of valuation that cost does not equal value”. Secondly, the approach used by the PTE was “inherently unreliable”, as it was based on the cost of alterations to the other bus stations, rather than on the replacement of the subject premises.

Having rejected the approach of the acquiring authority, the tribunal was left with the approach of the claimant, which was somewhat unconventional. It was described as an “income and expenditure” approach and involved estimating the income which could be generated by an operator of the bus station, based on the charges paid by bus operators for each bus and coach departure. From this were deducted overheads, in the form of utilities, wages and rates, to arrive at a net annual income. This was then treated in the same way as the annual rent, and capitalised at an yield of 7 per cent, based on comparable evidence drawn from secondary shops in the locality. The tribunal accepted this as a legitimate approach, though any first-year valuation student who has been taught that there are only five methods of valuation may have difficulties in categorising this one.

The five generally accepted methods are:

  • direct capital comparison;

  • investment method;

  • profits method;

  • contractors test or depreciated replacement cost; and

  • residual method.

The approach adopted appears to have elements of the profits and investment methods. It arrives at an annual profit, but then treats it as a rent, which is capitalised as under the investment approach.

The Tribunal did not feel the need to concern itself with such niceties, but did express some criticism of the calculation, if not the general approach. It first decided that with respect to expenditure, insufficient allowance had been made for wages, and that allowance had to be made for annual repairs and renewals also. It was then decided that the whole of the profit could not be treated as a rent. In an analogy to the approach adopted in rating valuations it decided that the figure arrived at by this approach was not a rent, but a figure, which represented both rent and profit. It stated that if the premises were held as an investment, then the occupier would expect to retain around half of that sum as his own profit, and pay the remainder as rent. It also decided that a yield based on secondary retail premises was far too low and adopted an yield of 12 per cent.

With this amendment it becomes clear that what is being used is a reasonably conventional investment valuation, though with the profits method being used to assist in arriving at an estimate of open market rental value.

After making these adjustments the Tribunal discovered that, although the claimant's approach had been used, the figure arrived at was actually lower than the sum offered by the acquiring authority using the incorrect DRC approach. It therefore, decided to adopt the acquiring authority's figure in its decision.

Increased rent

The next part of the claim considered by the Lands Tribunal related to additional rent. It is not disputed that the claimant had little choice in the alternative accommodation he was able to rent within the two remaining bus stations, or that this accommodation was larger and the rent more expensive. The claimant calculated the amount of this increased rent, capitalised it at an yield of around nine per cent, and claimed this sum as part of the disturbance claim. The Tribunal had little sympathy with this aspect of the compensation claim from the start. It first noted that there is a strong presumption that when alternative premises are taken, either freehold or on lease, the claimant obtains value for money in respect of the purchase price or rent payable, and suffers no financial loss. The circumstances in which this presumption are rebuttable, were set out clearly in the case of J Bibby and Sons Ltd vs Merseyside County Council (1979) 4 P&CR 53: would be right to award compensation in respect of such items if it was shown, first, that the claimant, as a result of the compulsory purchase, had had no alternative but to incur the increased operating costs concerned, and, secondly, that he had had no benefit as a result of the extra operating costs that would have made the occurring of them worthwhile.

With respect to the first test the Tribunal accepted that the YTC acted reasonably in taking the premises they did; that the increased rent was a direct and reasonable consequence of dispossession; and it was not too remote. It then turned to the second test, but was not persuaded that the YTC had been able to rebut the presumption of value for money, commenting:

YTC have taken the lease of larger and better premises, adapted to their use, at a market rent. YTC claim that part of the accommodation is surplus to their requirements. The extent of this accommodation has not been identified. The reason why this accommodation is surplus has not been identified. The lack of benefit has not been identified .... The burden of proof is on the YTC. They have failed to show that they do not to derive any benefit from the leased accommodation, commensurate with the increase in rent. I am not persuaded that the presumption of value for money has been rebutted.

The Tribunal also felt it necessary to comment that the payment of this claim for additional rent would have constituted “double counting”. If a claimant receives compensation for the property he has lost, and is then paid for the cost incurred in respect of replacement accommodation, he is effectively being compensated twice for the same loss. Again, this presumption could only be rebutted where the claimant is able to demonstrate that he receives no value for money for the costs incurred in respect of the replacement accommodation.

Loss of revenue

The largest single item of claim was for £5,961,518 in respect of “loss of revenue”. YTC claimed that this was the sum of money that had been lost during the period from 1999 to 2005 due to the physical and financial effects of the change of control of the bus station, and the actual works undertaken by the PTE. The Lands Tribunal was, however, unimpressed by both the calculations presented in support of the claim, and the principal expert witness for the PTE. In respect of the expert witness the number of the Tribunal commented that,

I do not question his competence nor his honesty but I do question whether he had the essential independence and objectivity for an expert witness.... He relied wholly on information given to him by YTC, including reasons as to the possible cause of any loss. He did not investigate further but relied on what he was told. He could not be described as an objective and truly independent witness.

In short, I think that he has given his evidence in support of the YTC claim as put to him rather than as an independent expert producing his own figures of loss and opinions as to cause of that loss. For these reasons I treat his evidence with caution.

Given the Tribunal's concerns regarding the principal expert witness in respect of this item of claim, it is not surprising that they decided the losses were not proved. It found that on the evidence available it was impossible to tell whether the losses claimed were a direct result of the compulsory purchase, or was due to external factors such as a decline in bus usage. It felt that the figures put forward in support of the claim were “all over the place”. In any event, it considered that the whole approach to the assessment of this aspect of the claim was incorrect. Even if it had been possible to establish the amount of revenue lost as a result of the scheme, it would not necessarily equate to the losses suffered by the claimant, as there could have been associated reductions in expenditure. This type of loss should have formed part of a loss of profits claim which “would reflect the benefits by showing the net loss (if any) due to the acquisition and consequent changes of control and improvement works”.

The Tribunal decided that no compensation was payable under this substantial head of claim. This should be a salutary lesson to expert witnesses that they will be expected to produce evidence which is quantifiable and accurately researched, and to be aware that when presenting that evidence their duty is to the Tribunal, and not to the party which is paying their fee.

Purchase notice and Schedule 3 development

Schedule 3 development is probably the most anachronistic and complex of the modern compensation provisions, having inherited the title with the abolition of the provisions relating to unexpended balance of development value, by the Planning and Compensation Act 1991. It is destined to go the same way under the current review of the compensation code, but until that time any clarification of the strange ways in which this provision works is to be welcomed. It is for this reason that the case of Old England Properties Ltd vs Telford and Wrekin Council (2000) is of interest.

The claimant was the owner of a piece of land, which stood alongside a railway line and which in the past had been the site of a local railway station. In 1998, it applied for outline planning permission for residential development and was refused. In most cases this would be the end of the matter. The claimant had presumably paid a price for the land which reflected the likelihood that planning permission would be refused, and his gamble had not paid off. However, in spite of the fact that there was now no realistic possibility of obtaining planning permission for residential development, Schedule 3 offered the claimant the hope that he may yet be able to sell the land at a price reflecting residential planning permission.

Schedule 3 was originally introduced as a transitional provision with the introduction of the Town and Country Planning Act 1947. It was a minor concession to landowners who felt that the introduction of planning controls would deprive them of development value which was already attached to their land. It gave no practical right to do anything with the land, but did say that for compensation purposes only, it should be assumed that planning permission would be given for certain forms of minor development. In respect of some of these forms of minor development, there was a direct right to compensation should planning permission be refused for that development. Other forms of minor development were included only as assumptions as to planning permission, which would apply in the event that the land was the subject of a compensation claim under the planning or compulsory purchase provisions. The application of Schedule 3 was reduced by the 1991 Act so that it remains only as a compensation assumption for very limited types of development. Principal among these is the assumption that planning permission would be granted for the rebuilding of any building which stood on the site on 1st July 1948, but has subsequently been demolished, at its original size plus ten per cent.

In the context of the introduction of national planning controls for the first time, it is possible to see some purpose behind such a provision. In the 21st century it exists only as a means by which a fortunate few can obtain compensation for loss of development value which does not actually exist.

It was in the hope that it would become one of these fortunate few that the claimant served a purchase notice following the refusal of planning permission for residential development of this site. It was able to demonstrate that following the planning refusal the land was “incapable of a reasonably beneficial use”, as a result of which the purchase notice was accepted, though only after an appeal to the Secretary of State.

The effect of a valid purchase notice is that the planning authority is forced to acquire the site by compulsory purchase, and a notice to treat is deemed to have been served. Compensation is assessed under the normal rules of compulsory purchase including the planning assumptions contained in Sections 14 to 16 of the Land Compensation Act 1961. These include the assumption of Schedule 3 development.

In the real world, the land had no significant value. It could not be disputed, however, that the land had to be acquired at a price which reflected the assumption that planning permission would be granted for rebuilding any of the buildings which stood on the site in 1948. These included the station house situated partly on the subject land and partly on adjacent land in other ownership. The ground floor of the station house was formerly in residential use.

Although forced to accept the principle, the acquiring authority argued that the assumption of planning permission for Schedule 3 development added nothing to the value of the site. It is a well-established principle that planning permission does not by itself add value to land; it only adds value when it is coupled with demand for the land for that use (Camrose vs Basingstoke Corporation (1966) 1 WLR 1100). It is not disputed that in this location there was no demand for commercial uses such as the former station buildings. While there was a demand for residential property, the right to rebuild what stood on the site in 1948 in this case gave only the right to rebuild that part of the station house which was originally on a narrow strip of the subject land. This would clearly have no value. It argued that there can be no assumption of planning permission to rebuild a completely different building or to merge the original buildings into one large building.

The claimant, however, took a more robust view. In its opinion, it is not necessary to assume that the building would be a slavish copy of the original building. Improvements and other alterations are allowed, as would be a different sitting for at least some of the walls of the replacement building. Pushing its luck perhaps, it went further. Given that it was necessary to assume that the local planning authority would give planning permission for one house on the site, it was then logical to consider what their attitude would have been to development of the remainder. “An inevitable consequence of the planning policy which led to the grant of planning permission for one house is that permission would be granted for up to four houses. This permission cannot be assumed under the 1961 Act but inevitably follows from the 1961 Act assumptions.”

The Lands Tribunal clearly had little sympathy for arguments which would allow the claimant to obtain substantial compensation for land which in the real world had no significant value. It accepted both the claimant's argument that it was not necessary to assume that the replacement building would be a slavish copy of the original, and the argument from the acquiring authority that it could not be assumed that planning permission would be granted for a totally different building. It had to decide whether the assumption of a planning permission falling somewhere between these extremes would have any value. It considered a number of previous cases in its attempts to decide whether planning permission should be assumed in this case for the building of a single dwelling in roughly the same area as the original station house. It established the following propositions from its reading of those cases.

  1. 1.

    The rebuilding envisaged under paragraph 1(a) of Schedule 3 to the 1990 Act must constitute the rebuilding of the original building and not the erection of a new building; this is a question of fact and degree in each case.

  2. 2.

    Rebuilding must take place on the site of the foundations of the original building, subject only to any minor deviations necessary to allow the permitted increase in size.

  3. 3.

    There is no compulsion on rebuilding to create a slavish copy of dimensions, appearance and materials of the original building.

  4. 4.

    A notional planning permission under Section 15(3) of the 1961 Act maybe incapable of implementation and therefore valueless.

Applying those propositions to the facts of this case it found that planning permission should be assumed for the rebuilding of the part of the station house solely within the bounds of the reference land, such rebuilding only to take place on the site of the original foundations subject to minor deviations.

It also rejected the claimant's argument that if planning permission could be assumed for any residential use of the land, there must be some hope value, due to the prospect that planning permission would be obtained for further residential development of the site. The claimant had supported its argument by reference to the case of East End Dwellings Co. Limited vs Finsbury Borough Council (1952) AC 109 in which Lord Asquith said,

The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.

The tribunal did not accept its argument for two reasons, and was not prepared to arrive at the “boggling” conclusion that planning permission was likely for four houses on the site. First, the assumed planning permission was only for the rebuilding of part of a house on a narrow strip of land. Secondly, even if the assumed planning permission is for one house, it is not an inevitable consequence that planning permission would be granted for up to four houses. Therefore, while it did not accept the argument of the acquiring authority, that the assumption of further development was not permitted under the statutes, it did not consider that on the facts of this case there was any realistic prospect that the planning assumptions which were made would have led to further planning permissions.

As this was a referral on a preliminary point of law only, it was not necessary for the Tribunal to decide whether this very limited assumption of planning permission adds anything to the value of the site. The member could not, however, resist making the following comments which make his view very clear:

I would need clear and persuasive evidence before I could accept that the restricted planning permission I have found would be granted on the reference land adds anything to the value of the land, either on its own, or as the cause of the possible grant of planning permission for up to four houses. In my view, a hypothetical purchaser of the reference land would look at the restricted planning permission to be assumed under section 15(3)(a) of the 1961 Act and would probably conclude that he should not attribute any value to it.

The Tribunal added that in its view the claimant's basis of compensation was misconceived. The purpose of Schedule 3 was originally to compensate an owner for the loss of its existing use right to rebuild what was originally on the land and therefore part of that existing use. It is not to allow an owner to assume a right to carry out development unrelated to that existing use, as would be the case if planning permission were to be assumed for one to four houses, in replacement of a railway station. It also commented on the anomalous situation, which would arise if the council were required to acquire the reference land under a purchase notice, because it had become incapable of reasonably beneficial use, and then pay compensation for a building site for one to four houses. It expressed satisfaction that it had not been forced to perpetuate this anomaly, and that the application of the relevant statute provisions had produced a common sense answer.

Plea for claimants to be given reminders regarding time limits

The case of Co-operative Wholesale Ltd vs Chester-le-Street DC (1998) 3 EGLR 11 came as something of a surprise to many practitioners in the compensation field when it established that a six-year limitation period applies to compensation claims. I was not the only surveyor to quickly check his filing cabinet to see whether any of the claims I was dealing with were out of date. While six years would seem to be an ample period of time to deal with most compensation claims, it is clear and that this is not the case from the large and increasing number of Lands Tribunal cases which are concerned with this limitation period. Under Section 9(1) of the Limitation Act 1980 an action to recover any sum recoverable under statute shall not be brought after the expiration of six years from the date on which the cause of action accrued. This does not mean that the claimant is no longer entitled to compensation after that time. He is, however, no longer able to enforce his entitlement to compensation through the Lands Tribunal, and must rely on the goodwill of the compensating authority to pay such compensation as they consider appropriate.

The case of Harry Peter Owen vs Highways Agency (2003) was not particularly unusual, in that it concerned a claim for compensation under Part I of the 1973 Land Compensation Act. It was not even particularly deserving, as a claim would probably have failed for other reasons in any event. The claimant made reference to the Lands Tribunal more than six years after the relevant claim day, and it was, therefore, inevitable that the Lands Tribunal would find his claim statute barred. The comments of the Lands Tribunal member suggest, however, that even the Tribunal itself is becoming concerned at the number of claims which fail because of this time limit. It expressed sympathy with the claimant who thought he had safeguarded his position by submitting a compensation claim within the relevant time limit, commenting;

...his perplexity is perhaps not altogether surprising. There is nothing that requires a compensating authority that has received a claim to alert the claimant to the fact that there is a limitation period in respect of references to the Lands Tribunal. Consideration ought to be given, it seems to me, to making such notification a rule of practice.

I would recommend that breath should not be held, while waiting for acquiring authorities to heed this plea.