Compulsory Purchase& Compensation

CPO powers• Public bodies with statutory powers

– Local authorities– Highways Agency– Utility companies– Transport infrastructure providers

• Main sources of CPO powers– Act of Parliament– Order under Transport and Works Act 1992

Possession• By agreement

– Price in accordance with ‘Compensation Code’ (equal to compensation payable had land been compulsorily acquired, i.e. land value plus compensation)

• Following a Notice to Treat and Notice of Entry– NTT served <= 3 yrs of CPO– Respond with notice of claim– May not receive compensation for new works or interests created after NTT date

• By a General Vesting Declaration– Similar to NTT but conveys title to acquiring authority (AA) as well as giving right to enter and

take possession

• By procedures for acquiring short tenancies (<= annual fixed or periodic)– AA acquires superior interest and served NTQ (no compensation under CP legislation)– Notice of Entry (compensation payable for any unexpired term)

• In response to a blight notice– May bring forward acquisition if blighted– NB. Blight may be due to other planning and development proposals as well as CPOs

Principles

• Who is entitled to compensation?– Anyone with an interest in land, i.e.

» Freeholders» Leaseholders» Mortgagees

– No compensation for Easements and Restrictive Covenants, unless altered or extinguished

• Heads of claim– Compensation for land taken (compulsorily acquired)– Compensation for severance and injurious affection

» Where some land is taken» Where no land is taken

– Disturbance compensation

The legal background

• Section 5 Land Compensation Act 1961 (as amended):• SIX RULES FOR ASSESSING COMPENSATION1. No allowance shall be made on account of the acquisition being

compulsory– but, there are ‘loss’ payments

» Basic loss payment (lower of 7.5% value of interest or £75k)» Occupier’s loss payment (complex rules)

2. The value of the land…if sold in the open market by a willing seller might be expected to realise

– Seller assumed to be ‘willing’– Basically same as MV– Can be difficult to get to MV if CPO has been around for a while: BLIGHTBLIGHT– MV includes

» Development and Hope Value (more later…)» Marriage Value and Ransom Strips, see Stokes v Cambridge Corporation

(1961)

The legal background

3. ‘The special suitability or adaptability of the land for any purpose shall not be taken into account if that purpose is a purpose to which it could be applied only in pursuance of statutory powers, or for which there is no market apart from the requirements of an authority possessing compulsory purchase powers ’

» MV does not include enhanced value attributable solely to the particular use proposed to be made of the land under a scheme of which compulsory acquisition of the subject land is an integral part

» This element of value is not part of MV because it is not an element the owner could have realised in the open market

4. No increase in value is to be taken into account if it is contrary to law» For example, illegal user in breach of planning consent

5. ‘Where land is, and but for the compulsory acquisition would continue to be, devoted to a purpose of such nature that there is no general demand or market for land for that purpose, the compensation may if the Land Tribunal is satisfied that reinstatement in some other place is bone fide intended, be assessed on the basis of the reasonable cost of equivalent reinstatement.’

6. ‘The provision of Rule 2 shall not affect the assessment of compensation for disturbance or any other matter not directly based on the value of land.’

Valuation Guidance

• Must depart from Red Book definition of MV and follow statutory regs:– Land Compensation Act 1961– Compulsory Purchase Act 1965– Land Compensation Act 1973…as amended by the:– Planning and Compensation Act 1991– Planning and Compulsory Purchase Act 2004…and case law! …

The ‘no scheme’ world

• Land Compensation Act 1961 (as amended)• s.6 – the Statutory Rule for disregarding the ‘scheme’:

– No account is to be taken of any increase or decrease in Market Value due due onlyonly to the acquiring body’s scheme

– The ‘scheme’ is tightly defined in the Act, e.g.» area covered by CPO» New Town

– Examples of problems with s.6:» Where there is more than one CPO» Where there is a developing and evolving New Town

– ‘Point Gourde’ Principle» Compensation cannot include an increase in value which is entirely

due to the ‘scheme’ underlying the acquisition• s.9 – Blight

– No account to be taken of the depreciation in value due to the threatthreat of compulsory acquisition

Compensation for land taken

• Based on principle of equivalence• Effects of CPO on value of property are ignored

– Value land on OMV basis without increase or decrease attributable to development which underlies the CPO

• Valuation date is earliest of:– date AA enters and takes possession (NTT procedure) or date title vested

in AA (GVD procedure)– Date values agreed– Date of Lands Tribunal decision

Value of land taken• If there is a market for the land, then MV

– Must disregard fact that acquisition is compulsory (i.e. willing seller)– MV: higher of

• EUV• Development value (which may include marriage value or ransom value

provided they would have existed in the ‘no scheme world’)– Assessing the planning position (s14-17, Land Compensation Act 1961 (as

amended)); the following may be assumed:• Existing planning permission• Permitted development not yet implemented• pp for acquiring authorities proposal (but ignore special suitability and

wider ‘scheme’)• pp in accordance with an allocation in a Local Plan• Certificate of Appropriate Alternative Development (hypothetical

planning permission)

Value of land taken• If there is no market, then cost of equivalent reinstatement

– Difficult to justify if the interest is a short lease– Uncommon in relation to business premises– Four general tests

• Land must be used for a purposes that would continue• No market• Bona fide intention to reinstate• If reinstatement cost is disproportionate then may not be allowed

• Whether market or not, if additional development permitted within 10 years of acquisition, owner is entitled to uplift

Ransom strips

Development Land

Housing

RoadOwner of yellow land gets % of development value of green land, in

Stokes v Cambridge (1961) it was 1/3

Severance and injurious affection

Severance: retained land loses values because it has been severed from the acquired land

Injurious affection: retained land loses value due to proposed construction on and use of acquired land for the scheme

The latter is payable where:

i.part of an owner’s land is acquired, or

ii.no land is taken

Severance and injurious affection:part land taken• You own a business unit of 1,000 m2 which was split into two 500m2

bays. One is CPO’d for railway development and compensation is paid based on MV of property acquired.

• If it is demonstrated that there is greater demand for 1,000m2 units than 500m2 ones and that the retained unit depreciated in value as a result of not being held with the part acquired, compensation would include an amount in respect of severance.

• If the retained land depreciated as a result of being adjacent to the railway line, compensation would reflect this injurious affection too.

Value where part of an owner’sland is taken

• Statutory basis:Value of land taken+ severance and injurious affection (which must be consistent with basis of

claim for land taken) to retained land- set-off for betterment of retained land (can’t be > total compensation

amount, i.e. least amount of compensation payable is nil)+ disturbance (if land is acquired at value that assumes EUV) – see later

• So compensation is foro Loss of Land (already discussed); ando Reduction in value of the retained land (due to severance and injurious

affection)

• How to Calculate– Combine assessment of claim for land taken, severance, injurious affection

and betterment together using a BEFORE & AFTER valuation approach– Agree value of whole property in a ‘no scheme world’

– e.g. MV before scheme = £250,000– Value remaining part in ‘scheme world’

– E.g. MV after scheme = £200,000– Difference (if any) is compensation

– i.e. £50,000– NB. If the MV of land taken was £30,000, loss in value of retained land

(due to severance and injurious affection) is £20,000

Value where part of an owner’sland is taken

Injurious affection:when no land is taken

• Two options– Execution of works; and/or– Use of works

• Execution of works– s.10 Compulsory Purchase Act 1965– Four rules must be satisfied (McCarthy Rules), injury done must:

» be authorised by statutory power» arise from that which would, if done without the statutory authority, have been

actionable at law, for example, as a nuisance» arise from a physical interference with some right, public or private, which

attaches to the land» arise solely from the execution of the works and not as a result of their

subsequent use– Valuation date = date of loss– Basis of compensation = diminution in value of interest

Injurious affection:when no land is taken

• Use of works– Part I Land Compensation Act 1973 (Part I claims)– Enables an owner of a qualifying interest to claim compensation where no

land is taken but a property is depreciated in value by the use of public works due to physical factors only

– Public Works (highway, airport, etc.)– Physical Factors (noise, vibration, smell, fumes, smoke, artificial lighting,

etc. not loss of view or privacy!)– First date of claim = 12 months after the use of the public works first

commenced– Last day of claim = 6 years from the first claim day– Valuation date = same as the date you can first make a claim (see above)– Basis of value = Diminution in Value of Interest, based on Existing Use

Value only– Qualifying interest = FH or LH business premises with at least 3 years

unexpired and RV <= £29,200 (2005 List)

Injurious affection:when no land is taken

Disturbance Compensation

• Rule 6• Only if compensation is based on EUV

– You can’t have your cake and eat it!• The occupier can claim either:

– Costs of Relocating the Business; or– Cost of Total Extinguishment

…in most cases the occupier will only be granted relocation costs.• BUT a sole trader aged 60 or over in a property with RV <= £29,200 (2005

List) has a statutory right (s.46 LCA 1973) to opt for total extinguishment• Certain interests in land may also be entitles to a ‘loss payment’ in

addition to other compensation due• Investors have limited rights to compensation introduced by the PCA

1991 for the costs of re-investment in another UK property for up to one year from the date of entry.

Disturbance Compensation

• Typical relocation costs that can be claimed for:– Removal– Legal, surveyor’s and architect’s fees and Stamp Duty relating to

acquisition of new premises– Special adaptations to replacement premises– Loss of profits during move– Diminution of goodwill following move (reflected in gross profits)– Depreciation in value of stock– Notification of new address to customers and new stocks of stationery due

to change of address• Typical extinguishment costs

– Value of business goodwill– Loss on forced sale of stock, vehicles and P&M– Redundancy costs– Admin costs of winding up the business

Acquiring short tenancies• No requirement to serve a NTT but compensation arrangements similar

to other interests:– Land taken: compensation payable in respect of MV of LH interest and

should reflect any renewal rights– Severance and injurious affection: right to compensation for diminution in

value of retained land, even if retained land is held under a separate lease, provided it is adjoining or adjacent

– Disturbance: only losses relating to period between date of entry and expiry of term are recoverable

• If tenant has security of tenure under LTA54, disturbance compensation can be claimed under CPO legislation or LTA54

Occupiers with no compensateableinterest in land• Limited rights to compensation for occupation agreements that are less

formal than a lease, such as tenancies at will, tenancies on sufferance and licences

• Compensation is for relocation costs and any loss of goodwill• Regard is had to amount of time the land occupied would have been

likely to have remained available for the purposes of the business and to the availability of other suitable land

• If tenant is holding over under LTA54 security of tenure provisions, disturbance compensation under the LTA54 provisions can be chosen if > CPO disturbance payment

Mr B is the owner-occupier of a bakery that is subject to a CPO and he has come to you for advice. He has lived in the upper part and run the bakery on the ground floor for the last five years. The rent is currently £70,000 p.a. for the whole property on an IRI lease with 10 years unexpired. The MR is £100,000 p.a. (£60,000 p.a. for the shop part). The RV of the shop is £40,000.

Net profit from the bakery for last three years was £160,000, £170,000 & £180,000. Costs include rent, mortgage interest (£10,000), repairs (£5,000), rates (£20,000) all relating to the whole building. Remuneration for Mr B (who works full-time) and Mrs B (who works half-time) has not been deducted. Mr B is 62 and does not wish to buy another business.

Land taken (Rule 2, S5 LCA61)

Market Rent (IRI) (£) 100,000

Plus landlord’s expenses;

External repairs (£) 5,000

Insurance (£) 5,000

Market Rent (FRI) (£) 110,000

Less rent paid (£) -70,000

Profit rent (£) 40,000

YP 10 years @ 8% 6.7101

Valuation (£) 268,404

Disturbance (Rule 6, S5 LCA61)Claim for total extinguishment under S46 LCA73Take ave of last 3 years’ earnings as best evidence of profitability

Net profit (£) 170,000

Mortgage interest (£) 10,000

Repairs for upper part, say (£) 1,000

Less (hypothetical) part-time assistant (£) -40,000

Less profit rent in respect of shop part, say (£)

-30,000

Less interest on capital:

fittings (£) 15,000

stock (£) 5,000

cash (£) 3,000

Total capital 23,000

Amortised at 8% x 0.08

-1,840

Adjusted net profit (£) 109,160

Adjusted net profit (£) 109,160

Capitalised in perpetuity at a target rate return of 20%

5

Value of goodwill (£) 545,800

Additional items [a]:

Sale of fittings to acquiring authority (£) 10,000

Notification to suppliers (£) 1,000

Loss on stationery (£) 1,000

Disconnection of services (£) 500

Removal costs (£) 3,000

Finding new living accommodation (£) 4,000

Home loss (£) 5,000

Disturbance compensation (based on total extinguishment) (£)

570,300[a] Business is a bakery so there is no forced sale of stock