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Copyright © 2011, Emerald Group Publishing Limited
Compulsory purchase and compensation update – 2011
Article Type: Law briefing From: Journal of Property Investment & Finance, Volume 29, Issue 6
In this year’s briefing I look at three cases which consider preliminary points of principle and therefore provide clear guidance on the application of the compensation code, unhindered by inconvenient facts. The first concerns the ramifications of the House of Lords decision in Spirerose v. Transport for London (2009). With the more extreme conclusions of the Court of Appeal tempered by the Lords, this case is rapidly becoming a landmark decision, eclipsing Waters v. Welsh Development Agency (2004) as the benchmark for the assessment of the value of land taken and severance and injurious affection. Spirerose was again the main precedent considered in a Lands Tribunal case concerning the construction of a bypass around a rural Bedfordshire village. To what extent did the bypass create access and therefore development value in land on the edge of the village, and to what extent did it hinder residential development? The second case mainly considers whether lost rents can be claimed as disturbance, even though the rules seem to preclude any matter based on the value of land. It also provides a bonus lesson on the application of “before and after” valuations. The final case concerns a rare disagreement over the application of rule 4 of the six main rules of compulsory purchase – by far the simplest and least controversial of those rules.
2 Spirerose, the Pointe Gourde Principle and Betterment
The House of Lords decision in the case of Transport for London v. Spirerose (2009)4 All ER 810 was certain to have a major influence on future Land Tribunal decisions concerning planning assumptions and the approach to leaving out of account any impact on value caused by the scheme underlying the acquisition. One of the first such cases was Persimmon Homes (Midlands) Ltd, St Albans Diocesan Board of Finance and Old Road Securities v. The Secretary of State for Transport (2009) ACQ/196-199/2006. In this case a decision was made having regard to the Court of Appeal decision in Spirerose, and then reconsidered once a decision was made by the House of Lords in respect of the Spirerose appeal.
The case concerned the compulsory purchase of a plot of land on the edge of the village of Clapham, Bedfordshire, for the construction of a bypass. As is often the case the dispute was whether the land had development value, and if so the extent to which any such development value was influenced by the scheme underlying the acquisition: the bypass itself. In particular, the Tribunal was asked to consider two questions:
Whether or not the land is to be valued on the basis that planning consent for residential development would have been granted in the “no-scheme world”.
If not, whether there was hope value for such development, and the “degree of hope value” to be adopted in the valuation.
The valuations were agreed at extremes of £60,000 with no development potential and £4,938,130 with planning permission for residential development. However, this was an interim decision on the correct approach to valuation, and therefore no decision was made on the quantum of compensation.
2.1 The issues
The tribunal identified four subsidiary issues to be determined:
Whether, in the “no-scheme world” there would have been a sustainable highways objection to residential development
Whether, in the “no-scheme world” there would have been a sustainable planning objection to residential development.
If there was a sustainable highways or planning objection, whether there was hope of future residential development of some or the entire site at the valuation date.
Whether there should be any set-off for betterment in respect of contiguous lands belonging to the claimants.
2.2 The cancellation approach or imagine no scheme was ever though of?
The facts outlined to the tribunal indicated a classic Spirerose situation. The bypass had been planned for many years, perhaps decades, prior to the valuation date and planning policies had evolved in the knowledge of this. The claimant has a strong argument that planning policies would permit residential development of the site. The acquiring authority will argue that those planning policies would be different if there had not been a bypass proposal. This, in turn, raises the question of whether the scheme should be left out of account by assuming it was cancelled immediately before the valuation date, or by imagining no scheme had ever been thought of. The former approach has the advantage of relative simplicity and certainty, but may not fully leave out all the effects of the scheme. The latter approach is the only way to fully leave the scheme out of account, but the task of imagining how planning policies, surrounding land, and the site itself may have developed over many years in an imaginary “no-scheme world” is virtually impossible.
2.3 The acquiring authority’s case
In this case the acquiring authority argued that the proposal for a bypass influenced planning policies from 1993, eight years before the valuation date, when a review of the local plan commenced and resulted in a revised local plan with policies which would have been materially different but for the scheme. Therefore the tribunal should, it was argued, consider what decisions a reasonable planning authority could have been expected to decide in a world in which no bypass was proposed, not what the actually planning authority have decided based on planning policies at the valuation date. In the absence of a bypass there was no reason to think that land on the outskirts of the village would obtain planning permission for housing. The claimant was wrong to argue that the tribunal should proceed based on the actual attitude of the Highways Agency, which did not object to the scheme, because that attitude would have been very different if no bypass had been planned.
The difficulty faced by the acquiring authority was in finding evidence to convince the Tribunal that the Highways Agency would have objected to the scheme in a true “no-scheme world”, even though they had not done so in the real world. It was able to point to general guidance on restricting access points to trunk roads but nothing specific to the subject site, and in fact there was evidence that the Highway Authority had considered the possibility that no bypass would be built before deciding to raise no objection.
2.4 Insufficient evidence the policies would differ in a no-scheme world
The tribunal therefore had little difficulty in finding for the claimant on the first point, and having done so did not consider it necessary to decide whether it was required to consider the likely actions of a reasonable planning (or highway) authority or the actual authority.
The decision on question 2 was similar. The acquiring authority argued that this was an attractive rural village in which it was highly unlikely that substantial residential development would have been permitted but for the bypass proposal which improved access and created a new logical boundary for the developed area of Clapham. This was simply not considered by the Tribunal to be a strong enough argument to counter the fact that development had been permitted in the real world and the planning authority was under pressure to find sites for new housing. While the line of the new bypass undoubtedly formed a convenient development boundary for the village, there was no clear link from here to the acquiring authority’s argument that in the absence of the bypass, planning policies would have opposed residential development.
2.5 Extent of hope value
The tribunal had decided in favour of the claimant on the first two issues, but only in respect of part of the site so it still needed to consider issue 3. It decided on the facts of the case that there would be a modest degree of hope that planning consent would be granted in respect of the remainder of the site some time after 2006.
2.6 Betterment only applies to a direct increase in value
Issue 4 was the question of whether the bypass created any betterment to the claimant’s retained land. He argued not, because in his view the retained land would have been granted residential consent with or without the bypass. Before coming to a decision the Tribunal considered the previous Lands Tribunal decision in Portsmouth RCDTR v. Hampshire CC (1980) 1 EGLR 150 which suggested that a deduction for betterment should be applied only when the scheme (a road in both cases) has a direct impact on the value of retained land, e.g. by providing a new or improved access, and not where the impact is indirect e.g. causing a change in planning policy which then results in a planning decision in respect of the retained land. If this decision was to be followed, the acquiring authority would have no case because their entire argument was based on how planning policies had been shaped by the scheme. The tribunal concluded that while planning policies may have been influenced by the bypass, they were not dependent on it:
The grant of planning permission on the retained land was not attributable to the additional capacity provided by the bypass.
Betterment did not apply because the scheme did not directly create additional value to the claimant’s retained land.
The tribunal did, however, comment that if it was wrong on this point (in the event of an appeal) and the development of the retained land was betterment arising from the scheme, than the betterment would substantially exceed the value of the land taken and no compensation would be payable.
The decision so far was reached prior to the House of Lords decision in Spirerose v. Transport for London (2009). This major decision, relating to the interpretation of the Pointe Gourde principle requiring the effect of the scheme to be left out of account, was toned down somewhat by the Lords compared to the decision of the Court of Appeal. In particular, the Appeal Court invented a new planning assumption – any planning permission likely to have been granted in the “no-scheme world”. The House of Lords considered it absurd to treat a probability of planning consent as a certainty by assuming the consent has been granted, and decided to leave a possibility as just that, and awarded compensation based on hope value.
2.8 Cancellation approach preferred
The tribunal looked closely at the House of Lords decision in Spirerose, and also at Urban Edge Group Ltd v. London Underground Ltd (2009) UKUT 103 (LC) and concluded that the scheme should be left out of account, and the prospects of obtaining planning consent assessed, in the following way:
The correct approach to adopt is to determine the prospects as at the valuation date on a cancellation assumption.
In complex cases of this nature it is usually difficult to find clear guidance on the correct approach to valuation because the facts get in the way. This is true in many aspects of this decision, particularly concerning the planning consents to be assumed, which depend more on a detailed examination of changing planning policies than on legal precedent. However, on the cancellation approach there is a statement of exceptional clarity. The scheme is to be left out of account by assuming it has been cancelled immediately prior to the valuation date, not by imagining what may have happened if no scheme had ever been thought of. This immediately destroys the case of the acquiring authority which is built entirely on the presumption that in a true no scheme world, planning policies would have developed in a completely different way over a period of many years.
What else can be gleaned from this decision? Well, this is where the facts do get in the way, but the decision on the question of betterment is very interesting. A deduction from compensation for set off because the value of adjacent land belonging to the claimant has been enhanced by the scheme will only apply where the betterment is directly caused by the scheme not, as in this case, where it is caused indirectly by the scheme affecting planning policies which then enhance the value of the retained land. Perhaps this substantial limitation reflects a widely held view that betterment is inherently unfair – why should the owner of land which is partly taken for the scheme have to give up some or all of any increase in the value of his retained land, while his neighbours who receive the same benefit but are fortunate enough to have no land taken are allowed to retain the whole of their windfall?
3 Disturbance – loss of rent
Interpretation of Tribunal decisions such as that referred to above is often impeded by the facts, which are unique to each case and reduce the value of the decision as a precedent in subsequent cases where the facts are inevitably different. This is less of a problem in the cases considered in this article such as Pattle and Pattle v. Secretary of State for Transport (2009) ACQ/7/2007 which concerned preliminary points of law. The Tribunal was at pains to point out that that the application of those legal points to the assessment of compensation in this case is a matter for a subsequent hearing.
The case provided particularly useful guidance of the application of disturbance compensation under rule 6, s.5 1961 Land Compensation Act to loss of rental income. It will often be the case that schemes underlying CPO’s will impact on rental income from investment property. The very fact that the property is threatened by compulsory purchase will deter potential tenants, as may the nature of the scheme itself. This reduces demand, creating increased voids and reduced rents – financial losses entirely due to the scheme. However, rule 6, the nearest thing there is to statutory authority for the payment of disturbance refers to “compensation for disturbance or any other matter not directly based on the value of land”. Rents are clearly based on the value of land so is rule 6 inapplicable? Is compensation not payable under disturbance for loss of rent?
It was accepted by both parties that loss of rent due to general blight of the area due to the scheme could not be claimed – loss of rent could only be considered for compensation where it was due to the prospective acquisition of part of the claimant’s property. The Tribunal took the view that in this case any loss was caused by prospective acquisition and not general blight, and could not be struck out for this reason.
They therefore had to consider whether, if incurred, the lost rents were allowable. This was complicated by the fact that the lost rents included some which the claimant expected to receive from property which would have been developed but for the uncertainty caused by the compulsory purchase order. Proving such losses is likely to be difficult, but at this stage the Tribunal was concerned only with whether they were allowable in principle.
The first difficulty for the claimant is that in order to claim disturbance it is necessary to be dispossessed of occupation. An investor is not in physical occupation, so arguably has no right to a claim. Courts have taken a liberal view of “occupation” in the past, but in this case decided that the question does not even arise. Rule 6 provides a claim for “compensation for disturbance or any other matter not directly based on the value of land”. While the loss of rents was originally claimed as disturbance, the claimant argued that the claim actually fell under the second part of this rule – matters not directly based on the value of land. Not disturbance, and therefore no requirement for dispossession (though rent is surely based on the value of land?). There are apparently precedents for this, but I was not aware of them. It seems now that there is an additional head of claim to the standard three. As well as land taken, severance and injurious affection and disturbance, each compensation claim should also consider a claim for matters not directly based on the value of land.
3.1 The authority’s case
The claimant argued that the lost rents were clearly due to the scheme, and came up with a range of arguments in support of the claim. The acquiring authority pointed out that:
It is not right to start from the principle of equivalence and to find some global figure of compensation to satisfy that principle […] the assessment of compensation must start by assessing the separate statutory heads of claim in accordance with the principles applicable to those heads.
The annual rents claimed are directly based on the value of land and are excluded by the closing words of rule 6.
Rents claimed from property which would have been developed in the no-scheme world could not be allowed as this would involve applying a different basis to separate parts of the claim. Land taken has to be valued in its actual physical condition at the valuation date. How could compensation for disturbance be assessed on the basis that that the property had been redeveloped?
3.2 The decision
The tribunal did not accept the authority’s arguments.
The claimant may well be able to establish that deferment of the development was due to the scheme. If so, disturbance can be claimed by an investor who is not in occupation of the land. The case of Wrexham Maelor BC v. MacDougall (1995) 69 P&CR 109 established that a claim under the second part of rule 6 is not limited to occupiers. Moreover, compensation is not limited to claims for costs or expenses and extends to any loss subject only to the ordinary principles of causation and remoteness. Neither did the tribunal accept that a claim for lost rents during the period prior to taking possession was a matter “directly based on the value of land” The value of land is defined in rule 2 and incorporating that definition into rule 6 it reads:
The provisions of rule (2) shall not affect the assessment of compensation for disturbance or any other matter not directly based on the amount which the land if sold in the open market by a willing seller might be expected to realise.
An ingenious if dubious interpretation of rule 6 which redefines the rule as excluding only losses relating to capital, rather than rental, land values. In the view of the tribunal the wording is intended only to prevent double counting by excluding from rule 6 losses which could be claimed under rule 2.
The tribunal then considered whether lost rents could be excluded on the grounds that they arose on land which was not actually acquired for the scheme. Again it found for the claimant – while it might be difficult to establish a causal link between lost rents on land not taken and the compulsory purchase, that was a matter for the subsequent hearing and there was no reason to exclude such losses in principle.
Similarly, the fact that the lost rents arose from property which had not in actuality been developed, created problems of fact, but in principle there was no reason why they could not be claimed.
Finally, the tribunal returned to the initial point, which appears to have been accepted by both parties, that rental losses caused by the general blighting effect of the scheme were not allowable. It confirmed the accuracy of this assumption by reference to Shun Fung Ironworks (1995) 2 AC 111 which states that to be claimed as disturbance losses must be fairly attributable to the taking of land, rather than to the general blighting effect of the scheme, which will impact on all properties in the locality, rather than just on those acquired.
3.3 Before and after valuation
With the benefit of the guidance of the Lands Tribunal the parties will now have to calculate compensation, and return to the tribunal if they are unable to agree. In order to reduce the likelihood of this eventuality, the parties asked for one further piece of advice, and this produced possibly the most useful valuation guidance.
Compensation will include the usual three elements of land taken, severance and injurious affection, and disturbance (and the fourth – matters not directly based on the value of land?). In respect of the first two of these, the parties disagreed as to the correct approach.
For the acquiring authority it was argued that compensation for each element should be calculated separately. The value of land taken should first be assessed on the basis of open market value. Severance and injurious affection should then be calculated by comparing the value of the retained land in a no-scheme world with its actual value.
The claimant preferred a shortcut “before and after” approach in which there is just one calculation comparing the value of the whole of the claimant’s property in the no-scheme world with the actual value of the retained land.
The tribunal described the claimant’s approach as the “before and after” method, which is misleading as both approaches involve a before and after calculation. The only difference is that in the claimant’s approach the before valuation is applied to the whole of the claimant’s land, while in that of the acquiring authority the before valuation is applied to the same retained land as the after valuation.
It is difficult to argue that the separate approach favoured by the claimant is not the more technically correct. This was spelt out in words of one syllable by the Appeal Court in Hoveringham Gravels Ltd v. Chiltern DC (1977) 35 P&CR 295. It dissected in detail the wording of s.7 1965 Act which gives the right to compensation for severance and injurious affection, and concluded that it clearly referred only to the retained land. Compensation under this provision could only be awarded to the extent that it reflected depreciation in the retained land before and after the scheme. The court stressed that it had reached this conclusion reluctantly as it could produce an unfair result. There is no alternative provision applying to land taken so any damage to the value of retained land caused by severance and injurious affection cannot be claimed.
At the time of the Hoveringham decision the courts no doubt assumed Parliament would act quickly to plug this gap, but this has not been the case and in recent years the Courts have found it necessary to actively interpret the legislation in a way that produces a fair result, regardless of the way section 7 is worded. It was therefore inevitable that it would do so in this case, particularly as the authority’s own valuer stated that he preferred the claimant’s approach because “it has the benefit of also encompassing any loss in the value of retained lands arising from severance and injurious affection”.
The tribunal therefore came down firmly on the side of the claimant’s approach because it “satisfies the principle of equivalence”. It distinguished the facts of this case from those in Hoveringham Gravels on the rather dubious grounds that, unlike in this case, in Hoveringham there were separate alternative planning permissions on the land taken and the land retained. The tribunal concluded:
We are not satisfied that the before and after valuation method should not be used as a matter of law. It will always produce a valuation that includes the value of the land taken and any severance/injurious affection even if they are not identified separately in the valuation process […] a “shorthand” approach to a correct result is not one that we would necessarily discourage […].
4 Value due to illegal or immoral use
Rule 4 as by far the least used and least controversial of the six main rules of compulsory purchase set out in s.5 1961 Land Compensation. It requires compensation to exclude any value due to a use which is illegal or detrimental to health. Perhaps because the latter limb has in the past been used in claims involving brothels, this is often summarised as the “illegal or immoral user rule”. However, as compensation is based on market value and the market is generally unlikely to pay extra for a property because it is put to an illegal use, the rule is rarely used. In fact, cases in modern times which have applied a reduction to compensation under rule 4 are as scarce as hen’s teeth.
Hughes v. Doncaster (1991) 1 AC 382 came close and went as far as the House of Lords. It concerned a scrapyard which had no formal written planning consent but had been established for many years so was eligible for a “certificate of established use”. In the real world this is as good as a planning permission to any purchaser, so would not affect the market value of the scrapyard. The acquiring authority put forward an ingenious argument. A certificate of established use confirms that a use is immune from enforcement action by the planning authority. Good enough for any purchaser but it does not make the use lawful. Technically the use is “illegal but unenforceable”. This has no effect on value in the real world, but in the world of compulsory purchase the use remains illegal so any value due to it must be excluded under rule 4. The courts seemed unable to fault the logic of this argument but eventually decided that compensation for scrapyard use should not be excluded because it was not the intention of rule 4 to prevent fair compensation being paid in such cases. If there was any danger that this aspect of the rule would continue to cause problems, it was removed at almost the same time when the 1991 Planning and Compensation Act replaced certificates of established use with certificates of lawful use.
4.1 Unlicensed scrapyard
Taff v. Highways Agency (2009) ACQ/23/2007 raised a similar issue, also involving a scrapyard. In this case there was a certificate of lawful use and a subsequent planning permission: what was lacking was a waste management licence. There was a history of fines for breaches of waste management regulations and, whist a waste management licence was eventually granted, this was after the valuation date. The acquiring authority argued that at the valuation date, those aspects of the use which required a licence were illegal, and to the extent that those uses affected the claim for both land taken and disturbance, those aspects of the claim should be disallowed.
The tribunal quickly dismissed this argument in respect of land taken, using an analogy with a public house. Any purchaser will be careful to ensure the pub has a valid planning permission. He will be aware that a licence will be necessary to run the pub, but this will not detract from the market value of the property.
Turning then to disturbance compensation, it might be thought that rule 4 is irrelevant as it refers only to “the value of land”. It is, however, well established and confirmed in Hughes that disturbance compensation, although usually calculated separately, is “part of the value of the land”. Therefore:
If disturbance compensation were founded upon a business use that could be stopped or would be unlawful, the increase in the value of land due to that element of compensation would be ruled out by section 5 (4).
Therefore, any claim for loss of profits must be based on trading figures which exclude any business which required a waste management licence. Rule 4 is, therefore, not totally toothless, though it remains to be seen at a subsequent hearing whether, on the facts of this case, there is such a claim.