Compulsory purchase and compensation update – 2009

Citation

(2009), "Compulsory purchase and compensation update – 2009", Journal of Property Investment & Finance, Vol. 27 No. 6. https://doi.org/10.1108/jpif.2009.11227fab.001

Compulsory purchase and compensation update – 2009

Article Type: Law briefing From: Journal of Property Investment & Finance, Volume 27, Issue 6

Introduction

In last year’s briefing I commented on the lands tribunal decision in the case of Spirerose v. Transport for London (2007). It seemed to me to set out some new and interesting principles, which, to some extent, appeared to conflict with established practice and some important precedents. Interesting enough coming from the lands tribunal, but this decision has since been affirmed by the Court of Appeal, and the outcome of a further appeal to the House of Lords is awaited. If confirmed again and given the authority of the Lords, Spirerose could become the most important legal decision in the compensation field in many years, eclipsing even their lordships’ decision in Waters v. Welsh Development Agency, an element of which the tribunal found to be simply “not correct”. It may be difficult for the Lords to accept such criticism from a lowly tribunal but if it does, Spirerose will bring about change in the basic approach to the valuation of land taken, as well as to the planning assumptions and the no-scheme rule.

First, however, I consider a case which is among the first to cast light on the application of a provision designed to improve the lot of claimants who do not qualify for disturbance compensation. Whether the light it casts will be able to penetrate the muddied waters it creates is, however, doubtful.

Expenses incurred in acquiring other land

One of the clearest inequities in the compensation code is that only certain privileged categories of claimant, those who qualify for disturbance, are fully compensated for their loss. Those who do not qualify, usually through not meeting the occupation criteria, such as investment owners or developers, receive compensation for the value of the legal interest acquired, but not for consequential losses such as loss of profits or removal costs.

This unfairness was reduced to a small extent by the Schedule 15 of the Planning and Compensation Act 1991 which introduced a new section 10A into the Land Compensation Act 1961. This provides that where a “person who is not then in occupation of the land” incurs incidental charges or expenses in acquiring other land within one year, “the charges or expenses shall be taken into account in assessing compensation as they would be taken into account if he were in occupation of the land”.

Disturbance or only some costs?

The section is clearly intended to require such claimants to be compensated for some of the costs which they would have been able to claim if they were entitled to disturbance, but not all. However, the wording is particularly unhelpful when it comes to deciding where to draw the line. Presumably the new property has to be one which is a direct replacement for the original, as otherwise a claimant who was “in occupation of the land” would not be able to claim those costs as disturbance. However, a claimant who qualifies for disturbance might well be able to claim many items of loss; some direct “charges and expenses in acquiring other land”; some indirect or closely connected such as bridging loans and replacement carpets; and some completely unconnected such as loss of profits.

So is compensation limited to the wording “charges and expenses in acquiring other land”? If so, why add the words “as they would be taken into account if he were in occupation of the land?” This seems to imply compensation akin to disturbance and therefore broader than the original definition.

Some guidance, and some confusion, was provided on this matter by the lands tribunal in Sadiq and Hashmi v. Stoke-on-Trent City Council (2008) LCA/316/2008. This was reference simply to determine what heads of claim fall within s10A.

An investment purchaser purchased a replacement property in Oxford and the acquiring authority accepted claims under s.10A for costs relating to the new property, such as the mortgage arrangement fee, survey fee and legal costs.

Disputed by the authority were:

1. 1.

   £800 early redemption penalty on the Stoke mortgage;

2. 2.

   £500 removal expenses;

3. 3.

   £1,000 loss on fitted carpets and curtains remaining at Stoke;

4. 4.

   £200 for disconnection of various appliances from Stoke and reconnection in Oxford; and

5. 5.

   £232.67 for gas and electricity certificates in Oxford.

Items (2) and (5) above were considered by the tribunal to be “clearly not recoverable” as they are expenses incidental not to the acquisition of a replacement property, but to its fitting out, as was that part of (4) relation to reconnection costs in Oxford.

It then considered items (1), (3) and the part of (4) relating to disconnections at Stoke. It decided that “None of these fall within section 10A. They represent losses suffered not in connection with the purchase of the new property, but in consequence of the compulsory purchase of the property in Stoke-on-Trent.

No entitlement, but pay up anyway

End of the matter you might think, given that the only question at issue was whether these items were recoverable under s.10A. However, the member then added that in his judgement these items ought to be recoverable because they are losses imposed on the claimant by the compulsory purchase.

The losses incurred are the direct and unavoidable consequence of the acquisition. They are not too remote. If the claimants are to be put “so far as money can do it, in the same position as if their land had not been taken from them” (Horn v. Sunderland [1941] 2 KB 26, the compensation must include these losses. Although not within section 10A, they do in my opinion fall squarely within rule (6) of section 5 of the 1961 Act and fall to be included in the compensation accordingly.

The member then added cryptically, “I hope that in the light of these conclusions the parties will be able to agree the amount of compensation payable”. This seems unlikely – he has told the parties that the sums fall outside the only relevant compensation provision, and then added that they “fall to be included in the compensation.” He indicates that they should be paid as disturbance under rule 6, even though it is a pre-requisite of s10A, under which the other losses were awarded that rule 6 does not apply!

The only possible interpretation is that the tribunal considers arriving at a fair compensation award to be more important than following the letter of the law, but then, why disallow items (2) and (5) which would also be allowable under rule 6?

This cavalier attitude follows only 12 months after the Greenweb case in which the tribunal felt itself bound to follow the letter of the law and award compensation of £1.6 million for the compulsory purchase of land with a value of at most £30,000 in any real world.

Until further clarification is provided it will be difficult to use this decision as any sort of precedent.

Spirerose goes to Court of Appeal and House of Lords

Last year I commented on the lands tribunal decision in the case of Spirerose Ltd v. Transport for London (2007) ACQ 41 2005. This case succeeded in producing a compensation award that pretty fairly reflected the loss suffered by the claimant. I did, however, express some concern that to do so it had to ignore some well-established principles of compensation and create a new planning assumption. Making law “on the hoof” like this has a tendency to backfire by creating precedents which can prove awkward in different circumstances. It is unsurprising that the case was referred to the Court of Appeal, which upheld it in November last year, and then to the House of Lords, which heard the case in June, and whose decision is awaited at the time of writing.

Value of the land taken

The first important aspect to the tribunal’s decision was the approach to valuing the land taken. The universally accepted approach under rule 2 of s.5 of the 1961 Land Compensation Act is to consider the value of such land as if offered for sale in the open market by a hypothetical willing seller. A problem can arise, however, where the land taken is of a nature that no reasonable hypothetical seller would sell it in isolation. Such was the case in Jelson v. Blaby (1977) 1 WLR 1020 where the Appeal Court had to consider the value of a long narrow strip of land acquired for a highway, in the middle of a modern residential development. Following the accepted approach the land had no significant value as in isolation it was too narrow to be developed. It did not even have marriage value, as by the valuation date the land to each side had been developed in a way that precluded development of the land taken. The decision in Jelson was that there was no requirement to assume that the hypothetical seller would sell the land in isolation and in the actual circumstances at the valuation date. In a “no scheme world”, he would sell the land together with the adjacent land before development took place, and thereby obtain full development value. In Spirerose the tribunal followed Jelson, which was one of 58 cases that it considered. However, it did not consider Hoveringham Gravels v. Chiltern DC 243 EG 911, which also went to the Court of Appeal in 1977. This case analysed the statute and case law in considerable detail and concluded that the land taken had to be valued is if offered for sale in isolation date in its actual condition at the valuation date – after all, if we assume a hypothetical willing seller, why assume he owns any adjacent land?

The question for the Appeal Court was, therefore, whether to follow the Jelson approach which produces a fair result, or the, perhaps more technically correct, Hoveringham approach, and value the land is if sold in isolation at a time not of the vendor’s choosing. In the present climate, in which the Courts have vowed to take up the sword of justice dropped by the government, this was no contest, particularly as the Court began its decision by noting that “The Law Commission recommended the replacement of the common law and statutory versions of the no-scheme rule in a comprehensive statutory code. That plea has so far gone unheeded by the legislature.” In fact the Jelson approach was not even debated, as it was accepted by both parties.

Are section 17 certificates worth the paper they are written on?

The Appeal Court decision related to the other main aspect of the lands tribunal decision – the planning assumptions. In this case, as in many others, a section 17 certificate (certificate of appropriate alternative development) had been obtained setting out what planning permission would have been granted if it were not for the scheme. However, the usefulness of such certificates is becoming questioned more and more. This is partly because the date of the certificate is rarely close to the valuation date, leaving scope for planning policies to have changed between the two, and partly because a statement from the planning authority stating what they would have permitted if there was no CPO will be based on planning policies in place at the certificate date, which may well have been different if the scheme had never existed. In this case the s.17 certificate was of virtually no assistance as it related to a date 8 years before the valuation date.

The “Pointe Gourde” planning assumption

With the other planning assumptions also being of little assistance, the tribunal decided to create a new one – the “Pointe Gourde” assumption. That is, any other planning permission which is likely to have been granted in a no scheme world.

There are two important features to this new planning assumption. First that it is a firm planning assumption, rather than a probability. In a situation where there is an element of uncertainty as to whether a planning permission would have been granted in a no-scheme world, it has always been the case that an element of “hope value” should be reflected in the value of land taken, to the same extent as it would have been in an open market sale. There will be no difference under the Spirerose approach, if the chances of obtaining planning permission are less than 50 per cent. Where, however, it is judged that on the balance of probabilities it is more likely than not that planning permission would be granted, hope value no longer comes into it. There is immediately a firm assumption, not only that planning permission would be granted, but that an application has already been made and approved prior to the valuation date. Therefore even if there is only a 60 per cent chance that planning permission for a particular use would be granted, compensation will reflect the full value of that consent.

Second, the Pointe Gourde planning permission requires an assessment of the planning scenario in the no-scheme world. If the s.17 problem outlined above is to be avoided, this no-scheme world must be one in which planning policies and new development have evolved, over a period of many years, as they would have done if the scheme had never even been thought of. This approach put the lands tribunal at odds with the House of Lords which, in Waters v. Welsh Development Agency (2004) 1 WLR 1304, recommended a narrow approach to ignoring the scheme, stating 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”. It cautioned against requiring valuers to adopt an approach which requires such a major diversion from reality that it becomes “unreal or virtually impossible”. The tribunal was not deterred, however, and simply pointed out that this aspect of the Lords decision was “not correct”.

The Court of Appeal might have been expected to favour the House of Lords decision, over that of the lands tribunal but it did not, expressing full approval of the tribunal’s approach. The only matter which was the subject of appeal was whether, at the valuation date, the probability that planning permission would be granted for a mixed use scheme should be converted to a firm assumption that planning permission was in place (the new Pointe Gourde planning assumption), or whether it should be reflected merely as hope value. In other words was the tribunal correct that its decisions are deterministic where they relate to issues as to “what would have happened in the past but for something which happened in the past”, and probabilistic where they relate to issues as to what may happen after the valuation date.

In agreeing with the tribunal, the Court of Appeal effectively endorsed the tribunal’s criticism of the House of Lords decision in Waters, and it will be interesting to read whether the Lords themselves are happy to confirm this appeal and endorse that criticism. To do so will be to effectively concede that one of the rules from Waters – that the Pointe Gourde principle should be applied in a manner which achieves a “fair and reasonable result”, applies regardless of whether it breaches another rule and requires an approach which is “unreal and virtually impossible”. The valuer must assess how the land taken, planning policies, and all other relevant factors would have evolved, often over many years or even decades, if no scheme had ever been thought of. He should then apply his valuation skills to that world, rather than the real one. This is effectively reverting to the advice given to valuers by Lord Denning in Myers v. Milton Keynes (1974) 1 WLR 696 to “conjure up a land of make-believe and let his imagination take flight to the clouds”.

Postscript on the Government’s response to the Law Commission report

Unusually, the Appeal Court, having completed its decision, added a postscript in which it rounded in no uncertain terms on the Government’s failure to accept the Law Commission’s recommendations for reform of the law of compulsory purchase.

The Court made reference to a number of criticisms of the existing law and a number of recent cases illustrating the inequity arising from it. These included the statement from Lord Nichols in Waters that:

The right to compensation for compulsory acquisition is a basic property right. It is unfortunate that ascertaining the rules upon which compensation is to be assessed can involve such a tortuous journey, through obscure statutes and apparently conflicting case law, as has been necessary in this case.

Cases mentioned included Greenweb and Colley v. Canterbury (1993) AC 401 in both of which sch.3 of 1990 Act resulted in rights to compensation which could only be described as bizarre. It added comments on another anomaly, relating to the time at which section 17 operates, noting that this mismatch between the judicial and statutory versions of the principle has been a basic weakness of the code, evident at least since the Jelson cases in the 1970s. Perhaps this criticism of the Government response that the Law Commission’s reforms were too ambitious and required to much additional work was unsurprising given that:

The present court comprises the Chairman of the Law Commission [Etherton LJ], a former Chairman who led the compulsory purchase project [Carnwath LJ], and a member of the court in Greenweb [Thomas LJ]. It therefore seems appropriate for us to add some comment on the background of the Law Commission work, and the Government’s Response to the final report, and to suggest a possible way forward.

It summarised its proposed way forward in the following terms:

It is not of course for us to comment on the relative weight to be given to the case for a new compensation code, as compared to the Government’s other legislative priorities. However, it seems that the form of the recommendations may have resulted in a failure to see the wood for the trees. Even if codification is not to be pursued, it does not remove the need to deal with the specific anomalies identified by the Commission. In the context of the planning assumptions that should not be a substantial or complex task.

The Appeal Court praised itself and other courts for making up for Government inactivity and introducing clarity and reform using case law, but noted that:

[…] other anomalies cannot be remedied without legislative change. Repeal of third schedule rights is an obvious example, and would be a simple first step. The mismatch between section 17 and the judicial version of the no-scheme rule was left unresolved by the House of Lords in Fletcher. As the response points out it involves a choice between two approaches, one potentially more favourable to claimants than the other. However, that is not a reason for preserving the mismatch. Deciding between the two approaches is a policy matter for Minsters and Parliament. It is not a complex issue. It simply involves a policy choice, which should be capable of resolution without great difficulty or commitment of resources. Once the choice has been made, it would not be difficult, as a matter of drafting, to adapt the statute to give it consistent legal effect. Those are just two examples. What seems to be lacking in the response, having rejected the case for a comprehensive code on resource grounds, is any systematic appraisal of the costs and benefits of the specific recommendations viewed as candidates for piecemeal reform. Greenweb is a stark warning that saving on law reform can be a very false economy. The present case, in which the parties spent several days before the tribunal and two days before us, with all the attendant costs in and out of court, is another demonstration of the human and financial cost of obscurity in the law.

The Appeal Court effectively rejects that part of the Government response which claims that the Planning and Compulsory Purchase Act 2004 dealt with the most urgent reforms, and insists that if it is going to be left with the task of dealing with most of the much needed reform programme, it at least expects the government to assist with the essential changes to the statutes.