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Copyright © 2008, Emerald Group Publishing Limited
Compulsory purchase and compensation update - 2008
Article Type: Law briefing From: Journal of Property Investment & Finance, Volume 26, Issue 4
When, in late 2005, the government decided to ignore the Law Commission’s proposals for a comprehensive review of compulsory purchase law, on the grounds that it had higher priorities, it could have been expected that that would be the end of the matter. We were left with the existing outdated legislation and we would have to make do with it indefinitely. However, it seems that the courts have been as annoyed as anyone at the failure of the government to tackle the problem, and I concentrate this year on three cases where they have made clear their intention to pick up the baton dropped by the government, and implement many of the Law Commission’s proposals by case law.
One of these cases was in the Court of Appeal, and the others in the lands tribunal. Unfortunately, their outcome illustrates the limits of the courts ability to change established statutory and case law principles, as much as it does their intention to do so. In fact, in two out of the three cases the award of compensation failed by a substantial margin to equate to the loss suffered by the claimant.
Severance and injurious affection where no land is taken
The courts were keen followers of the Law Commission’s proposals even during the consultation period for the proposed new provisions, and were prepared to refer to the planned changes in support of its decisions. In Waters v. Welsh Development Agency (2004 1 WLR 1304) Lord Nicholls stated that “until Parliament takes action I suggest your Lordships’ House, so far as it may properly do so, could seek to simplify the law, always having in mind that the aim of the law is to provide a fairer financial equivalent of the land taken”. In recent cases the Court of Appeal has gone further, expressing the opinion that “in the void created by government inactivity, the onus falls on the courts themselves to push forward with reform.”
In Moto Hospitality Ltd v. Secretary of State for Transport (2007) Lord Carnwath of the Court of Appeal noted that the government has so far declined to act on the Law Commission’s recommendations and that “in those a circumstances we think there is some obligation on the courts to do what they can to help rationalise the law”. The courts are, however, bound by the existing statutory provisions and, to a lesser extent, by case law. The outcome of this case illustrates the limitations of their ability to undertake reform, regardless of the inequity and the antiquity of the existing legislation.
The McCarthy rules
The case concerns possibly the most anachronistic and illogical of all the compensation rules; section 10 of the 1965 Compulsory Purchase Act. This section relates to the entitlement to compensation for injurious affection where no land is taken, and expresses this entitlement as “the same as the right which section 68 of the 1845 Lands Clauses Consolidation Act has been construed as affording”. This contrived wording by the statutory draughtsman speaks volumes as to the vagaries of section 10. This was a consolidation Act and his role was simply to write down clearly the law as it was already established. Apparently, however, he discovered that no one knew, or could agree, on what the existing law said. He decided to look back to previous statutes with a view to using the same wording. However, he had to go back all the way to 1845 to find any statutory reference to injurious affection where no land is taken, and even then the wording is not specific as to the circumstances in which compensation is payable, are or how such compensation is to be assessed. It was, therefore, the case law arising from the 1845 Act provision which had to be re-enacted, rather than the wording of the Act itself.
In particular, Metropolitan Board of Works v. McCarthy (1874) set out four rules, all of which need to be satisfied if compensation is to be paid under section 10. The rules are set out below but at this point it suffices to say that “camels” and “eyes of needles” would need to crop up in any advice to clients as to the prospects of obtaining compensation under the McCarthy rules.
The Moto case concerned a motorway service area (MSA) at the Ardley interchange between the M40 and the A43. Extensive alterations had been carried out to the junction, as a result of which there was strong evidence of a large fall in trade to the MSA, resulting in a diminished value.
The tribunal had decided that all four of the McCarthy rules were satisfied in this case and that, therefore, compensation was payable for some or all of this reduction in value. The Secretary of State appealed.
The four McCarthy rules have been considered and expanded upon in many subsequent cases, notably by the House of Lords in Wildtree Hotels Ltd v. The Borough of Harrow (2001) 2 AC 1. They apply only to claimants who have had no land taken and can be summarised as follows:
The works giving rise to the claim must be authorised by statute.
The works would have given the claimant and action for public or private nuisance, but for the protection afforded by the statutory powers.
Compensation is payable only to the damage to the claimant’s interest in land (not, therefore, for loss of profits which will have been substantial in this case).
Compensation is payable only for the damage caused by the “execution” of the works, not their operation and use.
The second of the above rules is the most difficult to satisfy. To start with there is the conceptual problem of trying to imagine whether the works would have given rise to a claimed the nuisance if undertaken by a private individual or body that was without statutory powers. In this case, and in fact in most cases, the works are of a nature which would only ever be undertaken by a public authority. The appeal court felt that “in such a context the public nuisance analogy becomes almost meaningless”. It was not helped by the fact that most of the case law comes from nineteenth-century cases, when motorway building was not a mainstream activity. Even more importantly, to have an action in nuisance the claimant has the difficult task of demonstrating that he has suffered particular damage to a personal legal right, over and above that suffered by the public at large.
The lands tribunal had found in favour of Moto on the two critical issues:
The works issue - the Secretary of State was wrong in saying that the loss arose from stopping of the slip roads, which was not part of “the works” for the purpose of section 10. The tribunal effectively widened the interpretation of “works” under section 10, beyond just works taking place on the CPO land itself, to include all associated works (including stopping the orders in respect of the slip roads related to the purpose for which the use CPO was made.
The public nuisance issue - the Secretary of State was also wrong in contending that Moto had not suffered particular damage that could have given rise to an action the nuisance. The tribunal decided that the purpose of the MSA - to provide services to motorists, gave it a bit particular value. Access was of particular importance to the land for that reason, therefore if that access was obstructed so as to cause diminution in value the claimant had suffered particular damage over and above that suffered by other landowners and by users of the interchange.
The basis of the appeal
The appeal by the Secretary of State was on the following points:
In respect of the “works issue” section 10 applies only to the Compulsory Purchase Order.
Consequently, compensation under section 10 is payable only for depreciation caused by works on land compulsory purchased.
Section 10 compensation is not payable for injurious affection arising from the stopping up of a highway.
The “wide” construction adopted by the tribunal was a significant extension of the accepted right to compensation under section 10.
The tribunal had failed to properly apply aspects of the McCarthy rules.
The appeal court quickly put aside ground 4 on the basis that if the tribunal was correct on the other points, then this point was irrelevant. In any event the current law was the subject of strong criticism by the Law Commission which had recommended that section 10 should be abolished, and Part I of the 1973 Land Compensation Act expanded to replace it. It noted that “the government has so far declined to act on these recommendations”. It was at this point that it noted that in the light of government inactivity, then reform by the courts may be the only option. On the “works” issue it decided in favour of Moto and the lands tribunal’s decision. A section 10 claim does not depend on works being authorised by the same provisions which authorised the CPO, and the works should be taken as a whole, regardless of whether all, or only part, of those works take place on the CPO land. Similarly, the tribunal was correct that section 10 compensation did not exclude losses arising from stopping up orders. Jolliffe v. Exeter Corporation (1967) 1 WLR 993 was authority only that a stopping of order made by a different compensating authority, under a different scheme not incorporating the 1965 Act, could not give rise to a claim under section 10. In this case the stopping of order was all part of the same works, undertaken by the same authority and authorised by the same Act.
At this point the Appeal Court appears to have decided all five points in favour of the claimant. However, it felt obliged to go further and consider whether section 10 had materially altered the compensation rules established under section 68 of the 1845 Act. It confirmed its support for the tribunal’s wide interpretation of the works by taking the view that “the inclusion of compulsory powers over part of the land is enough to apply section 10 to the effects of the whole of the scheme”.
It dismissed the compensating authority’s view that “particular damage under section 10 can only arise where works were ‘pertinent’ to the claimant’s land, and where the obstruction was ‘proximate’”. Neither of these was established as distinct tests by the case law.
It confirmed, even though it was not argued in this case, that although loss of profits cannot be claimed under section 10, where a fall in profit results in a fall in rental value, “for whatever period”, compensation is payable.
Claimant correct on all points - but no compensation
Having supported every argument put forward by the claimant up to this point, the sting was in the tail of the Court of Appeal decision. The tribunal had concluded that once “particular damage” was established, the only question was the amount of the loss. The Court of Appeal, however, inserted an intermediate step - was the loss suffered a direct result of “the works”, or was it “too remote”? In this case the junction improvements as a whole are “not a proper subject of claim as, for the most part, they were not part of the scheme related to the CPO. That having been established we do not think it is appropriate or realistic to examine the effects of individual obstructions which in this case are no more than incidental parts of the overall scheme”. Again going beyond the arguments put forward by the contesting parties, it noted an important distinction between this case and the nineteenth century precedents. The precedents generally related to interference with a highway by external factors, such as a railway. Where, as in this case, one set of highway works affects other highways, this is effectively swings and roundabouts, which must be accepted as part or ordinary business risk.
In conclusion to justify a section 10 claim there must be “a direct interference with the access to an individual site which goes beyond what is ordinarily incidental to the traffic objectives of the scheme as a whole. Otherwise it would be difficult to envisage damage which could be “sufficiently particular, direct and a substantial” to found a claim.
The section 10 claimed therefore failed in respect of the permanent stopping up orders. Most, if not all, of the arguments put forward by the claimant were, however, accepted and there is a strong likelihood that this case will allow future claimants a right to compensation under section 10 in circumstances where previously no right has been thought to exist.
The planning assumptions and schedule 3 development
If section 10 of the 1965 Compulsory Purchase Act takes the biscuit for the compensation provision most in need of reform, then schedule 3 of the 1990 Town & Country Planning Act must take the McVitie’s Digestive award for being the most in need of simple repeal. Certainly it was to be first against the wall in the Law Commission’s ill-fated proposals for reform. Once again, in recent years the courts, or at least the lands tribunal, have been willing to take up the sword, and while it has been unable to ignore schedule 3 completely, it has sought to limit its application. In particular, there have been a number of cases where schedule 3 has been found to apply, and to require the assumption that planning permission would be granted for the building of a house on land where in the real world there would be no prospect of obtaining such a consent. In these cases the tribunal has decided that while the planning consent must be assumed to exist, it adds little to the value of the land because the it would be for a property too small to meet modern demands, or so awkwardly located on the site, and so lacking in basic amenities such as a clear access, that the development would have little or no value.
This trend was not followed in Greenweb Ltd v. London Borough of Wandsworth (2007) where the tribunal had no qualms about deciding that a plot of land which had no significant value in the real world, and had been recently purchased by the claimant for £30,000, had a value for compensation purposes of £1,600,000 as a result of schedule 3.
The case concerned a piece of land, which, by the valuation date, formed part of an area of public open space. Unfortunately Wandsworth Council had not bothered to purchase the land before laying out the open space, and 17 years later in 1997 they belatedly opened negotiations. The owner applied for a section 17 certificate (1990 Town & Country Planning Act) for residential use, and also applied for planning consent for five houses. Both applications were refused on appeal, establishing that in the real world, there was no prospect of developing the site.
The basis of the claim
The claimant then served a purchase notice, which was accepted, as the land was clearly “incapable of reasonably beneficial use”. From there the procedure was familiar. The compensation claim was based on the assumption that, under section 15 of the 1990 Town & Country Planning Act planning permission would be granted for schedule 3 development. Schedule 3 development includes the rebuilding of any building which was in existence before 1 July 1948, or of any building in existence before 7 January 1937, but subsequently demolished (in order to include war damaged buildings). This land had accommodated a terrace of nine, three-storey houses and a commercial building, which were destroyed by bomb damage during the Second World War, and by 1948 accommodated four prefabricated houses. It was accepted that with planning permission to rebuild the former buildings, the site would have a value of £1,600,000, and with planning permission for four houses, £1,200,000.
On a simple reading of the current law the case was straightforward. Regardless of the fact that there was no prospect of a valuable planning permission in the real world, in the world of compensation for compulsory purchase, following acceptance of the Purchase Notice, planning permission had to be assumed for schedule 3 development, which included both the terrace of houses and the prefabs. Planning permission for a terrace of houses was the most valuable, and therefore compensation of £1,600,000 was payable.
To accept the law as it stands would be unfair
The argument from the acquiring authority was somewhat desperate. While the claimant was technically correct, it would be unfair for him to receive £1,600,000 in compensation for land with no significant value, and for which had recently paid £30,000. In order to comply with the principle of equivalence, the lands tribunal should not award a figure of compensation greater than the value of the land in the no scheme world.
The tribunal unceremoniously rejected this invitation to repeal schedule 3 by case law. It answered the argument that the principle of equivalence should overrule the planning assumptions of section 14 to 16 of the 1990 act with a number of clear statements:
The language of the provisions does not permit this.
There is no scope for refusing as a matter of discretion to apply an assumption.
There is simply no authority that even begins to suggest that the application of the assumptions in sections 15 to 16 is discretionary.
The history of schedule 3
The tribunal then entered into a detailed historical explanation of schedule 3, which was introduced to define those forms of development that were not nationalised in 1947. Given that the nationalisation of development value was repealed in 1953, this “defence” only tends to confirm the irrelevance of this provision to the twenty-first century. However, Parliament enacted this provision for a purpose, and had ignored many opportunities to repeal it, most recently when the Planning in Compensation Act 1991 when it repealed Part II of schedule 3, but not Part I which includes this planning assumption. Clearly Parliament intended schedule 3 to remain on the statute books, and to continue to be relevant when assessing compensation following acceptance of a purchase notice.
The tribunal went on to express disagreement with a previous decision of the Scottish lands tribunal, Northern Metco Estates Ltd v. Perth and Kinross 1993 SLT 28 that decided that a planning permission assumed under schedule 3 had been abandoned over time. “There can be no question, in our judgment, of abandoning the planning permission that is required to be assumed for third schedule development”.
So what are we to make of this apparently wholehearted endorsement of schedule 3, in spite of the fact that as a result the tribunal granted the claimant “a remarkable windfall gain”? Has it changed its mind and decided that, after all its efforts to minimise the more bizarre effects of schedule 3, it is in fact a reasonable and logical compensation provision? Or has it simply changed tack, and decided to try to shame the government into reform by allowing the absurdities of schedule 3 to thrive. The nearest there is to an answer is to be found at the end of the decision when the tribunal refers to the Law Commission’s proposals for change, which said of the schedule 3 provisions that “the survival of these rights seems unnecessary complication” and that “their historical value has been largely superseded, and they are an unnecessary complication in a modern code”.
The tribunal simply comments like” the facts of the present case and its outcome may be thought to add weight to that view”.
Jelson v. Blaby Resurrected
Spirerose Ltd v. Transport in London (2007) is a complex case in which the lands tribunal considered a total of 58 previous cases in arriving at its decision. It is surprising, therefore, that two cases which I would have thought to have been among the most relevant, and which might well have led to a somewhat different decision, were not among that list.
The case concerned the compulsory purchase of an industrial building in South Shoreditch. The main issue surrounded the planning assumptions to be made under sections 14 to 16 of the Town & Country Planning Act 1990. The claimant argued that planning permission had to be assumed for a mixed use development. The acquiring authority argued that there was little likelihood of such permission being granted and that, even if there wasn’t such a prospect, it should be reflected as hope value only, rather than being a firm planning assumption. It claimed that such assumption was contrary to statute and case law, and was contrary to the established principles of valuation.
In a lengthy decision the tribunal took the view that the Pointe Gourde principle applied to the planning assumptions, as well as to the basis of valuation, and therefore the planning assumptions had to be made on the basis that the scheme had never been thought of, even if that causes problems in deciding what may have happened over many years in what would effectively be a parallel universe. In coming to this view it relied to a large extent on the case of Jelson v. Blaby (1977) 1 WLR 1020. This case concerned the compulsory purchase, following acceptance of a Purchase Notice, of a long narrow strip of land reserved for construction of a road. By the valuation date the land to each site had been developed for housing and the road scheme had been abandoned. Relying on section 9 of the 1961 act, which requires the effect on value of the threat of compulsory purchase to be left out of account, and on the Pointe Gourde principle, the appeal court awarded compensation at residential development value, in spite of the fact that by the valuation date the land was a long narrow undevelopable strip in the middle of a housing estate. It decided that in the no scheme world the land would have been developed for housing along with the land to each side. Therefore full residential land values should apply.
Following Jelson, if no scheme had ever been considered for this land, the tribunal was of the view that a mixed use scheme would have been permitted, and should be a firm assumption for a the valuation purposes
The problem with this argument is, that while the Jelson approach produces a fair result, it is thoroughly contradicted by the Court of Appeal decision in Hoveringham Gravels v. Chiltern DC (1977) 243 EG 911 which was followed by the tribunal itself in Abbey Homesteads v. Secretary of State for Transport (1982) 263 EG 983. Abbey Homesteads concerned very similar circumstances, except that residential development of the surrounding land had yet to take place by the valuation date. It was decided that the land had to be valued in its actual physical condition as at the valuation date, i.e. a long, narrow, undevelopable strip of land. While section 9 and Pointe Gourde required that land to be valued as if there was no longer a road building scheme, they did not require, or allow, the assumption that the land was in some other physical state, e.g. part of a large site awaiting development, as it undoubtedly would have been if no scheme had ever been envisaged. Following the Abbey Homesteads principle, and regardless of any planning assumptions, the land was incapable of development in isolation, and at best had potential marriage value for merging with adjacent sites, in order to create a unit capable of development. In other words, the first step is to define the land being acquired, and s.9 and Pointe Gourde should then be applied to that land. They should not be applied to the first stage, and require the valuer to imagine what physical state the land would have been in at the valuation date, if no scheme had ever been envisaged.
Pointe Gourde as a planning assumption
The tribunal concluded that Jelson is binding on it, and that the Pointe Gourde principle is effectively an additional planning assumption to those set out in sections 14 to 16: any planning permission which would have been granted if the scheme underlying the CPO had never existed. It also noted a number of previous decisions in which valuers for both claimant and acquiring authority had accepted that planning permission had to be assumed for any development likely to have been granted in the no scheme world. Having ignored its own decision in Abbey Homesteads, the tribunal then went further by deciding not to follow a recent, and highly authoritative, decision about the House of Lords. It did refer to concerns expressed by the Lords in Waters v. Welsh Development Agency (2004) 1 WLR 1304 that “it is unreal to require land to be valued on the basis of what would have been the position if a major development which took place years ago had not been carried out”. However, the tribunal concluded that “to seek to restrict the application of Pointe Gourde in this way is not correct”. Therefore, although Waters preferred the approach of ignoring the scheme by assuming it was abandoned just before the valuation date, to that of imagining what may have happened over many years if no scheme had ever been considered, the tribunal chose to adopt the latter approach as it produced a fairer result.
On the valuation issue the tribunal was faced with the question of which approach is to be preferred when valuing development land - the residual valuation or a direct capital comparison approach. The tribunal’s traditional aversion to the residual approach, on the grounds that valuers can juggle figures to produce whatever valuation they wish, appears to have mellowed in recent years and this trend continued in this case. It based its award on a residual valuation, which it produced after borrowing the software used by the two parties in preparing their own valuations. As usual, however, the tribunal prefaced its award by stating that this was only being done because of a lack of good comparable evidence, and that it normally prefers a direct comparison approach.
The conclusion to come from this case is that the tribunal prefers to follow the somewhat discredited approach adopted in the Jelson case, to the more technically accurate approaches adopted in Waters and Abbey Homesteads. In its defence, it must be added that by doing so, this decision, if it is allowed to stand, produces a compensation award which most would consider to be fairer than the alternative.