Part V             
The compensation code-
core principles (2)

Introduction

                    5.1             Here, we consider other rules which form part of the core principles of the Compensation Code:

                                            (1)             Effects on retained land

                                                                   (a)              Severance and injurious affection

                                                                   (b)              Betterment

                                            (2)             Equivalent reinstatement

                                            (3)             Incidental rules

                                                                   (a)              Prospects of lease renewal and effect of rehousing tenants

                                                                   (b)              Illegal uses

                                                                   (c)              Enhancements with a view to increased compensation

                                                                   (d)               Consistency and mitigation

                                            (4)             Date of assessment

(1) Effects on retained land

                    5.2             Where the dispossessed owner has other land in the vicinity, its value may be adversely affected by the compulsory acquisition, or by the works for which the land is acquired (severance or injurious affection); or its value may be enhanced by them (betterment). We discuss below the existing law, and our proposals for the new Code.

(a) Severance and injurious affection

Existing law

Statute

                    5.3             The right of the dispossessed owner to compensation for severance or injurious affection is conferred by the 1965 Act, section 7,[1] which provides that in assessing compensation:

… regard shall be had… to the damage, if any, to be sustained by the owner of the land by reason of the severing of the land purchased from the other land of the owner, or otherwise injuriously affecting that other land by the exercise of the powers conferred by this or the special Act.[2]

In the earlier cases this was sometimes treated as simply one aspect of arriving at the “value to the owner” of the subject land.[3] However, more recent authority treats it as a distinct category of compensation.[4]

                    5.4             Although the wording of the section treats severance as a form of injurious affection, in practice they are distinguished:

                                            (1)             Severance is loss suffered by the separation of the land acquired from land held with it, where the joint holding conferred additional value or advantage;[5]

                                            (2)             Injurious affection is loss caused to the retained land by the works or use of the land acquired for the statutory purpose.[6]

                    5.5             Prior to the 1973 Act, compensation could be claimed under this section only in respect of injury resulting from activities on the land actually acquired from the claimant. Thus, for example, an owner, whose land was taken for construction of a road, could only claim for adverse effects caused by the use of that part of the road on the land taken from him.[7] The 1973 Act changed the position by providing that, in such a case, compensation for injurious affection should be assessed by reference to the whole of the works.[8]

                    5.6             Compensation for injurious affection where no land is taken is dealt with separately, under 1965 Act, section 10.[9]

A single holding

                    5.7             The case law establishes that land for which the claim is made must be “held with” the land which is taken. However, this means no more than that the pieces of land should be so related that “the possession and control of each gives an enhanced value to them all”,[10] or that “the unity of ownership conduces to the advantage or protection of the property as one holding”.[11] The pieces of land need not be contiguous with each other, nor be held in the same title.[12]

Accommodation and mitigation works

                    5.8             In practice, an acquiring authority will seek to limit the adverse effects and consequent compensation. For example, the effects of severance may be mitigated by providing bridges, or alternative accesses. Such works are normally referred to as “accommodation works”, although this is not a term used by the statute. Noise and visual intrusion may be lessened by noise barriers or tree planting. The 1973 Act took this practice a stage further, by imposing a duty on authorities to carry out noise mitigation works in circumstances defined by regulations;[13] and by conferring powers to acquire land, and carry out works, for the purpose of mitigation generally.[14] Similar mitigation powers may be conferred by other Acts for particular purposes, for example highways.[15] Such provisions will be left unaffected by the new Code.

Measure of compensation

Loss of land value

                    5.9             Compensation is payable for damage “by reason of other retained land of [the claimant] being less valuable to him.”[16] The measure of compensation, therefore, is the amount by which the retained land is diminished in value by the severance or injurious affection, and does not include other forms of loss, such as relocation costs.[17] Thus, for example, where an owner sought to mitigate the effects of severance, by constructing new farm buildings to replace those cut off by a road, his compensation was still based on the reduced value of the land, not on the cost of the replacement buildings.[18]

                5.10             On the other hand, compensation is not limited to reduced value due to matters which would be the subject of damages for nuisance, but includes, for example, reduction due to loss of privacy.[19] The “consistency principle” applies in this context, as in relation to disturbance.[20] Thus, if the land being acquired is valued on a basis which assumes severance from the retained land, for example for some alternative development, that element of severance should not be the subject of compensation.[21]

Market value

                5.11             There is a possible question whether the value of the retained land is to be assessed by reference exclusively to market value. As has been seen, the value of the acquired land for the purposes of the 1845 Act was treated as the “value to the owner”, rather than simply market value.[22] This was generously interpreted so as to enable account to be taken of loss of profits, and other matters now treated as “disturbance”. It has been suggested that the same approach, applied to severance and injurious affection, might allow such losses on retained land to be taken into account. Thus the last edition (1962) of Cripps’ standard work on Compulsory Acquisition of Land suggested that depreciation of land value need not be the only criterion, where the severance was such as to “cause to the owner disturbance in his present enjoyment of the land”; the principle of “value to the owner” should allow a more flexible approach.[23]

                5.12             However, since then the Hoveringham Gravels case has established that depreciation in the value of land is indeed the only criterion under section 7.[24] As we have already noted, rule (2) is expressed in general terms, as applying to the “value of land” for compensation purposes.[25] It is contrasted with rule (6), which allows a departure from market value in relation to any matter “not directly based on the value of land”. Compensation under section 7, in the light of the Hoveringham Gravels case, is a matter directly based on the value of land. In our view, therefore, diminution in market value[26] is the only test, and there is no room for a more flexible rule based on “value to the owner”.[27]

                5.13             The view we have expressed above, on the application of the market value test to this head of claim, is not clearly stated in any of the cases.[28] Further, our discussions with practising valuers suggest that, on occasions, claims based on loss of profits for retained land are advanced successfully in negotiations with acquiring authorities.[29] The new Code should make the position clear, one way or the other.

Other valuation rules

                5.14             There are similar uncertainties or inconsistencies about the application, under section 7, of some of the other rules which apply to valuation of the subject land.[30] There seems little doubt that rule (4), excluding value attributable to illegal uses, would be held to apply also to claims under section 7.[31] Other provisions of the 1961 Act are specifically applied only to the “relevant land”, that is, the land subject to acquisition.[32] On the other hand, it has been held by the Tribunal that the Pointe Gourde rule (or “no-scheme rule”[33]) does apply to the valuation of the retained land, so that the loss must be assessed by comparing the value of the land after the work, with its value in “the no-scheme world.”[34] This issue is discussed further in Part VII below.

“Before and after” valuation

                5.15             In principle, it seems, the reduction in value of the retained land should be assessed separately from the value of the land taken.[35] However, in practice a “before and after method” is sometimes used. This involves comparing the overall value of the complete holding before the taking, with the value of what remains thereafter.  In some cases it may be thought to produce a fairer result, which better accords to the principle of equivalence.[36]

Subsequent events

                5.16             The valuation must take account, not only of the use at the valuation date, but also of the depreciation due to anticipated use of the public works.[37] The Lands Tribunal has held that, for this purpose, it is permissible for the Tribunal to have regard to knowledge of subsequent events, at least to confirm what was anticipated at the valuation date.[38] If, however, as we have suggested, the true test is one based on market value then, in principle, the only relevant information is that which would have been available to the market at the valuation date.[39]

 Comparisons

                5.17             The Australian LAA(Cth) s 55(2)(a) contains a statutory statement of the right to compensation for damage to the retained land:

(iii) any reduction in the market value of any other interest in land held by the person that is caused by the severance by the acquisition of the acquired interest from the other interest; and

(iv) where the acquisition has the effect of severing the acquired interest from another interest, any increase or decrease in the market value of the interest still held by the person resulting from the nature of, or the carrying out of, the purpose for which the acquired interest was acquired.

                5.18              Paragraph (iii) appears to be the direct equivalent of severance under section 7 of the 1965 Act. Paragraph (iv) covers the same grounds as injurious affection under section 7, where the value of the retained land is reduced, but also betterment where the value is increased.[40] The test is clearly based on the market value of the land affected, and excludes other possible losses, such as loss of profits. This followed the recommendation of the ALRC, which thought that allowing claims for loss of profits would create a less certain test.[41]

                5.19             Similar illustrations can be found in Canada. The Canadian Federal Act of 1985[42] also limits the claim to the effect on market value, but provides specifically for a form of “before and after” valuation:

(1) The amount of the decrease in value, if any, of the remaining property of an owner is the value of all of his interests in land immediately before the time of the taking of the expropriated interest,… minus the aggregate of

(a) the value of the expropriated interest; and

(b) the value of all his remaining interests in land immediately after the time of the taking of the expropriated interest…

                5.20             By contrast the Ontario Act 1990 allows a claim, not only for any “reduction in market value” to the retained land caused by the acquisition, or by the construction or use of the works, but also for:

Such personal and business damages, resulting from the construction or use, or both, of the works as the statutory authority would be liable for if the construction or use were not under the authority of a statute.[43]

Policy Statement

                5.21             The response supports the existing arrangements for compensation under these heads, “subject to rectification of the anomalies identified by CPPRAG and others”. It expects “more detailed recommendations” by the Law Commission.[44]

                5.22             Three particular points were highlighted by the CPPRAG report:[45]

                                            (1)             The lack of provision for temporary loss caused to a business on the retained land during the works (for example, noise and dust, obstruction of access, and “general deterrent effect on customers”). It proposed that the claim for injurious affection should extend to:

Any damage caused to the claimant’s business carried out on the retained land if that results from the same factors as those which have caused the injurious affection to the value of his land so long as that does not result in any duplication of compensation.[46]

                                            (2)             The lack of compensation for the replacement of agricultural buildings, made necessary by severance, where the cost is not adequately reflected by compensation based on reduction in market value.[47] The Policy Statement suggests that this is more appropriately dealt with as part of compensation for disturbance.[48]

                                            (3)             The uncertainty over “before and after” calculations. CPPRAG suggested that specific provision should be made for the use of “before and after” valuations where “in the Lands Tribunal’s opinion, it is appropriate to do so.”[49]

Discussion

                5.23             We note that, in respect of permanent loss (apart from the issue of agricultural buildings), there is no proposal to change the existing basis of assessment, which depends on the value of the land.

                5.24             We agree generally with the particular points raised by CPPRAG, subject to the following:

                                            (1)             Temporary loss is not excluded under the present rules. A similar issue arose in the Wildtree Hotels case,[50] in relation to injurious affection where no land is taken. It was held that a temporary diminution in value caused by the works should be the subject of compensation, so far as reflected in reduced rental value.

                                            (2)             We agree that the “anomaly” in relation to the treatment of agricultural buildings should be corrected.  As the Policy Statement suggests, and as we have already proposed, it is more naturally included under the Disturbance rules.[51]

                                            (3)             We agree that there should be provision for “before and after” valuation (based on market value). We do not think it should depend on the exercise of discretion by the Lands Tribunal, since the issue may be agreed without reference to the Tribunal. We provisionally propose that this method should be available at the option of the claimant.

                5.25             As we have noted above, there is a possible issue as to how far this part of the Code should allow account to be taken of personal losses, such as loss of profits, in addition to any reduction in the market value of the retained land. We think the position should be clarified in the new Code. (A similar issue arises in relation to injurious affection where no land is taken.[52]) In line with our understanding of the present law, we propose that the loss under this head should be limited to loss of market value (including, where appropriate, loss of rental value).

                5.26             However, we have noted that in practice a more flexible rule may be applied. There is no similar limitation in the law of damages for nuisance, under which any consequential loss may be taken into account, subject to the ordinary rules of remoteness.[53] The Ontario Act provides a model for a more generous basis of compensation. We invite views on the desirability, and financial effects, of extending the basis of compensation in this respect.

(b) Betterment 

Introduction

                5.27             Betterment is not a current statutory term, but it is one frequently used to describe the enhancement in private land values resulting from public works. [54] As explained earlier in this Report, there has been a long history of attempts by legislation to recoup “betterment” within the planning system generally, the most ambitious being that embodied in the 1947 Act itself.[55] These appear now to be of no more than historical interest. In the present context, we are concerned with the more limited issue of enhancement in the value of land held with the land subject to compulsory acquisition.

Existing law

                5.28             Where the claimant owns other land, which shows an increase in value as a result of the acquiring authority’s scheme, there may be a requirement for the amount of the increase to be deducted from the compensation otherwise due. A deduction for betterment can only be made under specific statutory authority.[56]

                5.29             An example of such a provision, in relation to highway schemes, is found in section 261 of the Highways Act 1980:

…in assessing the compensation payable in respect of the compulsory acquisition of land by a highway authority…

the Lands Tribunal-

(a) shall have regard to the extent to which the remaining contiguous lands belonging to the same person may be benefited by the purpose for which the land is authorised to be acquired.

                5.30             In relation to acquisitions by other authorities, the 1961 Act, section 7 is a more complicated provision directed to a similar purpose in relation to increased value on “adjacent or contiguous land”. [57]

Comparisons

                5.31             The ALRC recommended against any statutory provision for deduction of betterment. It concluded that increases in value on retained land should be dealt with by taxation, to ensure equity between those whose land was taken and other landowners.[58]

                5.32             This recommendation was not followed. The LAA (Cth), following earlier legislation,[59] makes allowance for increases, as well as decreases, in the value of adjoining land. The valuer is required to take into account:

where the acquisition has the effect of severing the acquired interest from another interest, any increase or decrease in the market value of the interest still held by the person resulting from the nature of, or the carrying out of, the purpose for which the acquired interest was acquired;[60] (emphasis added)

Policy Statement

                5.33             The CPPRAG Review recommended that “betterment” should be set off only against compensation for severance or injurious affection.[61] The Policy Statement expressed agreement with this proposal.[62]

Discussion

                5.34             This proposal, which we provisionally adopt, represents a significant change from the treatment of betterment under the existing law. The claimant will be able to retain the advantage of any enhancement of his adjoining land, in addition to the market value of the land taken, and any compensation for disturbance.[63] It will only become relevant to the extent that he has a basis for claiming compensation for severance or injurious affection to other land. Accordingly, in the new Code it seems logical to link these provisions as a set of rules relating to compensation for effects on retained land.

                5.35             CPPRAG recommended that there should be a clearer definition of “adjacent land”[64] for this purpose, but did not indicate what particular problems they had in mind.[65] As has been seen, the expression “held with”, in the context of severance, has a well-established meaning, but a narrower definition (limited to “contiguous land”) has been used in the context of betterment.[66] We see no reason to limit the definition, since the real test is not the nature or location of the land, but whether the land is damaged or enhanced by the acquisition. However, we invite views as to the desirability of a more detailed definition.

Proposal 5: Injury to retained land

(1) Compensation for injury to retained land is to be assessed having regard to the following so far as applicable, assessed (subject to (5) below) at the valuation date:

(a) “Severance”, defined as the amount of any reduction in the market value of any interest of the claimant in any retained land, attributable to its severance from the subject land;

(b) “Injurious affection”, defined as the amount of any reduction in market value of any interest of the claimant in the retained land attributable to the nature of, or the carrying out of, the relevant project;[67]

(c) “Betterment”, defined as any increase in the market value of the retained land attributable to the nature of, or the carrying out of, the relevant project;

(d) The “relevant project” shall have the same meaning as in Proposal (8) below.

(2) Compensation under this Proposal is to be assessed by taking the amount of any severance or injurious affection, and deducting the amount of any betterment (save that the total shall not be less than nil);

(3) In assessing injurious affection or betterment, regard is to be had to the effects of the whole of the works comprised in the relevant project, whether on the subject land or elsewhere;[68]

(4) If the claimant so requires, the amount due under this Proposal is to be assessed by calculating the difference at the valuation date between (a) the market value of the subject land and the retained land taken together (disregarding any diminution due to the relevant project) and (b) the market value of the retained land on its own (taking account of any effect on that value of the relevant project).

(5) Where the injury for which compensation is claimed under this proposal is temporary in nature, injurious affection shall be assessed by reference to any reduction in letting value of the retained land during the relevant period, or such other method as the Tribunal may consider appropriate.

Consultation issues

                                           (1)             Under the existing law:

                                                                   (a)              Is compensation for injurious affection assessed solely by reference to diminution in market value? If not, what other factors are taken into account?

                                                                   (b)              How, if at all, is temporary loss taken into account?

                                                                   (c)              By reference to what valuation date is compensation assessed?

                                                                   (d)              Do the present rules give rise to any other problems needing to be addressed in the new Code?

                                           (2)             How should the issues (a) to (d) be dealt with in the new Code?

                                           (3)             In particular, what problems or additional costs would be caused for authorities, if compensation under these heads were to include compensation for loss of profits?

                                           (4)             Should express provision be made (as we propose) for assessment under these heads to be based on a “before and after” valuation of the holding? If so, should it be mandatory, or (as we propose) at the option of the claimant?

                                           (5)             Should the “retained land” be limited to land “contiguous” to the subject land?

 (2) Equivalent reinstatement

Existing law

                5.36             The right to compensation on the basis of “equivalent reinstatement” is confirmed by section 5 rule (5) of the 1961 Act:

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

The relevant date for assessing compensation is the date on which the reinstatement work could reasonably have been commenced.[69]

                5.37             Where the preconditions in rule (5) are satisfied the principle of equivalent reinstatement operates as an exception to the rule (2) market value approach. But its application is a matter for the discretion of the Lands Tribunal, which must first be satisfied as to three key ingredients:

                                            (1)             would the land have continued to be “devoted to a [particular] purpose”;

                                            (2)             does that purpose cause the land to have “no general demand or market”; and

                                            (3)             is there genuine intention to reinstate elsewhere?

                5.38             “Devoted to a purpose” in this context has been construed by the courts on several occasions. It is clear that the words are designed to go beyond a mere statement of present actual use or purpose: they import the need to ascertain the intended purpose of the building or structure[70] (although it appears that the building does not have to have been specifically designed for that use or purpose). The use of the premises for the devoted purpose must, however, be one to which they had been deliberately and voluntarily devoted.[71] The purpose itself should not be construed in too narrow a way.[72]

                5.39             “No general demand or market for land for that purpose” imports a factual test.[73] The House of Lords has held that only the word “demand” is qualified by “general”, and that “land” means any land and not just the subject land. So, in the context of a livestock market, rule (5) applied even though there was some demand, but that demand was intermittent rather than general.[74]

                5.40             It has been found, therefore, that equivalent reinstatement compensation is payable on acquisition of premises used (for example) as a playhouse theatre,[75] for religious purposes,[76] for charitable purposes[77] or as a club[78] - although each of these decisions turned on its own facts. But a multi-partner veterinary practice failed the test.[79] 

                5.41             Genuineness of intention to reinstate elsewhere is determined purely factually. The claimant must have both the ability to reinstate[80] and the intention so to do.[81]

                5.42             Because operation of rule (5) is discretionary, even where the statutory conditions are satisfied, the Tribunal may refuse to award compensation on this basis if the costs of reinstatement are disproportionate.[82] There is no statutory provision for any deduction for the improved quality of the new building.[83]

Comparisons

                5.43             Similar provisions are found in the Australian codes. LAA(Cth) 1989 s 58 gives a right to compensation based on reinstatement, where the subject land is used for a purpose “other than the carrying on of a business”, and there is no general demand for land used for that purpose. It is to be noted that under this model the equivalent reinstatement basis is a matter of right rather than discretion.

                5.44             The ALRC recommended that there should be provision for taking into account the improved value of the new building.[84] This is given effect in the section, under which compensation is based on the greater of the market value on the day of acquisition and the “net acquisition cost”, which is defined by a formula:

(3) The net acquisition cost, in relation to the interest in the new land, is the amount calculated in accordance with the formula:

CA + E  - FI

Where

CA is the amount of the cost, or the likely cost, to the person of the acquisition of the interest in the new land;
E is the amount of the expenses and losses incurred, or likely to be incurred, by the person as a result of, or incidental to, ceasing to use the old land and commencing to use the new land for the same purpose; and
FI is the present value of any real and substantial saving in recurring costs (relating to land or an interest in land) gained by the person as a result of the relocation.

                5.45             The LACA (Vic) s 42 achieves the same effect more simply, by providing that the cost of acquiring the new interest and the costs of relocation are to be adjusted -

by subtracting from the amount so ascertained the amount, if any, by which the claimant has improved, or is likely to improve, the claimant's financial position by the relocation.

Compensation on this basis is expressed in discretionary terms, without stating by whom the discretion is exercisable.[85]

Policy Statement

                5.46             The Policy Statement appears to envisage the continuation of the existing law. It rejects a CPPRAG recommendation that the onus should be put on the owner to prove that ordinary compensation would be insufficient to allow relocation.[86] It notes CPPRAG’s concerns that:

compensation should only be paid on an equivalent reinstatement basis if to do so would represent reasonable value for money or because there are strong social or public policy reasons for maintaining the displaced activity.

However, the response suggests it would be unreasonable to place the burden “entirely” on the claimant because of “the subjective nature of the factors to be considered”; and that accordingly:

…the final decision needs to be based on a balanced assessment of the facts and arguments presented by both parties. [87]

                5.47             It is accepted that “some element of betterment is likely to be inescapable”, since “the quality and intrinsic value of the new premises will normally be higher than that of the older buildings which are being replaced”.[88] However, there is no proposal for any reduction.[89] The new Code should make clear that:

professional fees and interest should be paid on the same basis and from the same date as for all other compensation claims.[90]

                5.48             Finally it is suggested that, by tying this issue to the decision of the Lands Tribunal, the 1961 Act may provide an excuse for procrastination by an intransigent authority. It should be made clear that compensation on this basis is not dependent on the Lands Tribunal, recourse to which should be a last resort.[91]

Discussion

                5.49             The Policy Statement does not propose any significant change to the existing rules, which seem to have worked reasonably well.

                5.50             We have noted above the line of cases interpreting the existing wording of rule 5, including such expressions as “devoted to a purpose” and “no general demand or market”. It would be possible to attempt a fuller definition, attempting to codify and clarify the effect of these cases. However, we think this could complicate the rule unnecessarily. By following the existing wording (as in the proposal below), it will be made clear that the existing judicial interpretations are generally to be followed.

                5.51             As noted above, the version of the rule in LAA (Cth) excludes business uses. We do not see any justification for a similar exception in the new Code. It would be a significant restriction on the English rule. For example, it would exclude such uses as the playhouse theatre and the livestock market, which have been allowed in the earlier cases.[92] It could also lead to arbitrary distinctions. Many specialised institutions, which are run as businesses, may have premises which it is difficult to replace in the normal market, and for which fair compensation may require something other than the ordinary market value approach.

                5.52             A rule allowing a deduction for enhanced premises, along the lines of the Australian models,[93] might be more in accordance with a strict application of the principle of equivalence. However, as the Policy Statement says, it might frustrate the purposes of awarding compensation on this basis, if the owner is unable to finance the shortfall. No such deduction is normally made in assessing common law damages, in cases where the replacement of premises is held to be the proper measure of the loss.[94]

                5.53             We note the Policy Statement’s reference to the desirability of a “balanced assessment”. However, we do not take this as intended to widen the discretion given to the Tribunal, nor to require any other legislative change. The Tribunal can be relied on to carry out a balanced assessment of the relevant evidence, in the light of the statutory criteria. Although the rule is expressed in discretionary terms, the cases show that the discretion is in practice a limited one. If the criteria in the rule are satisfied, including that of bona fide intention to relocate, the claimant can normally expect the rule to be applied. The only exception supported by the cases is where the cost of doing so is shown to be unreasonable (as explained in the Festiniog Railway case[95]).

                5.54               Accordingly, we propose that the new rule should in general follow the wording of the existing rule. However, in the interests of certainty, it would be useful to define further (in accordance with the position as explained above) the circumstances in which compensation may be refused, where the criteria are otherwise satisfied; and to make clear that an award on this basis can (and should where the criteria are satisfied) be made by the authority at the request of the claimant, without recourse to the Tribunal.

Proposal 6: Equivalent reinstatement

(1) Subject to (2), where (a) the subject land is, and but for the compulsory acquisition would continue to be, devoted to a purpose of such a nature that there is no general demand or market for land for that purpose, and (b) reinstatement in some other place is genuinely intended, compensation shall (at the option of the claimant) be assessed on the basis of the reasonable cost of equivalent reinstatement.

(2) Compensation on this basis may be refused by the Tribunal, if satisfied that it is in all the circumstances unreasonable, having regard to the cost to the authority and to the likely benefit to the claimant).

(3) Compensation on the equivalent reinstatement basis shall, at the election of the claimant, be paid in the circumstances set out in 1973 Act, s 45 (dwellings especially adapted for the disabled).

Consultation issues

Do consultees agree that:

                                           (1)             The existing rule (5) for equivalent reinstatement should be reproduced in the new Code in substantially its existing form? If not, what changes, or further definitions are required?

                                           (2)             The nature and extent of the discretion to refuse compensation on this basis should be set out in the Code (as proposed in proposal 6(2))?

                                           (3)             No specific provision should be made for a deduction for any increased value of the new premises?

(3) Incidental rules

                5.55             Under this head we consider rules for:

                                                                   (a)              Prospects of lease renewal and effect of rehousing tenants

                                                                   (b)              Illegal uses

                                                                   (c)              Enhancements with a view to increased compensation

                                                                   (d)              Consistency and mitigation

(a) Prospects of lease renewal and effect of rehousing tenants

                5.56             In assessing compensation under any of the heads, account will be taken, in the absence of provision to the contrary, of any limitations (in time or otherwise) on the interest, and the prospect of removing those limitations.[96]

                5.57             LAA(Cth) section 55 (2)(d) provides for there to be taken into account:

if the interest is limited as to time or may be terminated by another person—the likelihood of the continuation or renewal of the interest and the likely terms and conditions on which any continuation or renewal would be granted;

To provide certainty and for the avoidance of doubt a similar provision should be included in the new Code.

                5.58               The Code should also reproduce, in simple form, the effect of section 50 of the 1973 Act which is designed to ensure that compensation is not increased or decreased by the rehousing obligations of the authorities concerned: see App 3.

(b) Illegal uses

Existing law

                5.59             Rule (4) in section 5 of the 1961 Act is as follows:

Where the value of the land is increased by reason of the use thereof or of any premises thereon in a manner which could be restrained by any court, or is contrary to law, or is detrimental to the health of the occupants of the premises or to the public health, the amount of that increase shall not be taken into account

The rule applies to the assessment of compensation for disturbance,[97] and, it seems also to apply to severance and injurious affection.[98]

Comparisons

                5.60             Similar provisions are found in Australian and Canadian legislation, but in simplified form.[99] For example LAA (Cth) provides:

60 In assessing compensation, there shall be disregarded:

(b) any increase in the value of the land caused by its use in a manner or for a purpose contrary to law;

                5.61             Commenting on the English rule, the ALRC thought that it was sufficient to refer to uses contrary to law, and that references to detriment to health and uses restrained by a court were otiose.[100]  It quoted Professor Todd, commenting on the Canadian provisions:[101]

These sections clearly exclude value resulting from the illegal use of property for such purposes as gambling and prostitution. Unquestionably even without such statutory provisions the courts would exclude such value on the general ground of public policy.

In practice the more common instances of illegal uses are those which are contrary to municipal by-laws, particularly those relating to zoning. For example, the owner of residence zoned for a single family dwelling cannot claim an increase in capital value on account of revenue derived from an ‘illegal suite’ even though there may be evidence that buyers in the market would pay almost as much for such a residence as for one with a ‘legal suite’.

Policy Statement

                5.62             CPPRAG recommended abolition of the rule, on the grounds that it might unfairly exclude the value of relatively innocuous uses, which might reasonably be expected to continue. They thought that market value would in practice reflect the likelihood of an unlawful use being permitted to continue.[102] The Policy Statement rejected this view:

we recognise, and agree with, the view expressed by most respondents that it would be wrong for an owner to be compensated on the basis of the value of any illegal activity.We therefore intend to retain an updated and simplified form of the Rule (4) provision.[103]

We provisionally propose that the Code should retain a simplified version of the rule. We would, however, be interested in views as to whether there should be any exceptions to the general rule, for example where the breach is unintentional, or is technical and could be easily remedied.

(c) Enhancements with a view to increased compensation

Existing law

                5.63             The owner is free to deal with his property, and to grant new interests, following the date of notice to treat. However, case law has established the general rule that the burden of compensation cannot be increased after that date, by the creation of new interests on the subject land, or any retained land.[104]

                5.64             The Acquisition of Land Act 1981, section 4 protects against changes of interests, or works carried out, before or after notice to treat, if they were unnecessary and effected with a view to enhance compensation:

The Lands Tribunal shall not take into account any interest in land, or any enhancement of the value of any interest in land, by reason of any building erected, work done or improvement or alteration made, whether on the land purchased or on any other land with which the claimant is, or was at the time of the erection, doing or making of the building, works, improvement or alteration, directly or indirectly concerned, if the Lands Tribunal is satisfied that the creation of the interest, the erection of the building, the doing of the work, the making of the improvement or the alteration, as the case may be, was not reasonably necessary and was undertaken with a view to obtaining compensation or increased compensation.(emphasis added)

Comparisons

                5.65               The South African Expropriation Act 1975, section 12(5)(d) provides:

In determining the amount of compensation to be paid in terms of this Act, the following rules shall apply, namely-

…

d.    improvements made after the date of notice or to the property in question (except where they were necessary for the proper maintenance of existing improvements or where they were undertaken in pursuance of obligations entered into before that date) shall not be taken into account;

                5.66             Australian rules exclude extra value due to changes done without consent of the acquiring authority. Thus, LAA(Cth) s 60(d) excludes:

any increase in the value of the land caused by the carrying out, after a copy of the pre-acquisition declaration or certificate under section 24 in relation to the acquisition of the interest was given to the person, of any improvements to the land, unless the improvements were carried out with the written approval of the Minister.[105]

PolicyStatement

                5.67             The need for statutory rules is recognised by the Policy Statement:

the new legislation will also need to take account of other factors, including changes in the interests and the possibility that the nature of the fixed assets may change during the period between notice to treat and the date of taking possession for reasons which have nothing to do with the compulsory purchase order and for which the acquiring authority should not therefore have to accept financial responsibility.[106]

Discussion

                5.68             The present rules seem not to have created difficulties but could be simplified. The common law and statutory provisions could be brought together. However, in relation to the statutory exclusion (which is concerned with deliberate attempts to increase compensation) the need to satisfy the Tribunal should be retained. There seems to be no reason to introduce a requirement for consent of the acquiring authority, as in the LAA(Cth).  Our provisional proposal is given below.

(d) Consistency and mitigation

                5.69             In the discussion of disturbance we referred to the principle that the claim must be consistent with the basis of the claim for value of the subject land.[107] If the subject land is valued as having potential for development which would involve displacing the business in any event, no separate claim can be made for disturbance. Likewise with severance: if the land being acquired is valued on some basis which assumes severance from the retained land, for example for some alternative development, that element of severance should not be the subject of compensation.[108]  We propose that the principle of consistency should be expressed as one of the incidental rules, and we have framed a proposal accordingly.

                5.70             As already noted, the duty to mitigate arises principally in the context of disturbance, but could also be relevant to other heads, such as equivalent reinstatement and injurious affection. [109] We propose an incidental rule.

Proposal 7: Incidental rules

(1) Where an interest is limited as to time or may be terminated by another person, regard shall be had (in assessing compensation for that or any other interest in the subject land) to the likelihood (in the absence of the relevant project) of the continuation or renewal of the interest and the likely terms and conditions on which any continuation or renewal would be, or would have been, granted.[110]

(2) Where the subject land comprises a dwelling-house, there shall be left out of account any increase or reduction in the compensation otherwise payable, which is attributable to the fact that the authority (or any other public authority) have provided or undertaken to provide alternative residential accommodation for the claimant or a residential tenant (under the 1973 Act, s 39 or otherwise).[111]

(3) There shall be disregarded any increase in the value of the land caused by its use in a manner, or for a purpose, contrary to law.[112]

(4) There shall be disregarded:

(a) any new interests created over the subject land, or the retained land, between the date of notice to treat and the valuation date, in so far as they would increase the amount of compensation otherwise payable by the authority;[113]

(b) without prejudice to (a), any enhancements (by creation of interests, or works on the land or otherwise) where the Tribunal is satisfied that the enhancement was not reasonably necessary and was undertaken with a view to obtaining compensation or increased compensation.[114]

(5) Where the market value of an interest in the subject land is assessed on the basis that the land had potential to be developed or used for a purpose other than the purpose for which it was occupied at the valuation date, compensation shall not be allowed under other heads (disturbance or injury to retained land) in respect of loss or damage that would necessarily have arisen in realising that potential.[115]

(6) If it is shown that the claimant has failed (since the first notice date) to take action reasonably open to him to mitigate his loss, the compensation otherwise payable shall be reduced by the amount of such loss as could have been avoided by taking such action when it was reasonable to do so.[116]

Consultation issues

                                           (1)             In relation to proposal 7(3), should there be any exception to the principle that unlawful uses are disregarded (for example, where the breach is technical or unintentional, and easily remedied)?

                                           (2)             If so, how should the exception be defined?

                                           (3)             Do consultees have any other comments on the incidental rules as proposed above?

(4) Date for assessment

Background

Procedures

                5.71             As we have seen,[117] the normal form of compulsory purchase procedure begins with the making of an order by the authority, and service of notice on owners. Following confirmation of the order by the relevant Minister, the order is implemented by service of notice to treat on those interests which the authority wishes to acquire. This is the prelude to the process of agreeing compensation, or referring it to the Lands Tribunal for determination. In the meantime, the authority may take possession by serving a notice of entry under the 1965 Act, section 11. Interest on the full amount of compensation, once determined, will run from the date of possession until payment.[118]

                5.72             Under the alternative vesting declaration procedure, the authority, instead of serving notice to treat, makes a declaration vesting title in itself at a specified date.[119] Compensation is then assessed, and interest paid, as though the authority had served a notice to treat on the date of execution of the declaration, and had taken possession, following notice of entry, on the date of vesting.[120] This applies, apparently, even if actual possession takes place at a later date.[121]

Valuation date

                5.73             The current statutes give limited guidance as to which of these various dates is to be taken as the date for assessing compensation. Until 1969, it was generally accepted that the date of notice to treat was the critical date for most valuation purposes. The interests to be acquired were fixed at that date, and that was the date for assessing their values. In 1969, however, the House of Lords established, contrary to that practice, that values were to be assessed as at the date of possession by the authority, or (if earlier) the determination or agreement of compensation.[122] (This will be referred to in this discussion as “the valuation date”). The Policy Statement proposes no change in this respect.[123]

                5.74             There are two particular issues which were left unresolved by that decision, and on which the law remains uncertain:

                                            (1)             Does the date of notice to treat still “fix” the nature and extent of the interests to be acquired?

                                            (2)             In arriving at the single compensation figure, should any adjustment be made to those heads of claim (such as disturbance) which may be assessed by reference to a different date?

 Fixing of interests

The present law

                5.75             Following the West Midland Baptist case, there was some uncertainty as to whether the date of notice to treat continued to apply in determining the nature and extent of the interests to be valued. It seemed clear, in any event, that the physical state of the land, for valuation purposes, should be taken as it stood at the valuation date. Thus, if a building on the land is destroyed by fire between the date of notice to treat and the date of entry, it will not be taken into account in assessing compensation.[124]

                5.76             However, it was less clear what happened if the nature of the interests changed between notice to treat and the date of entry. The problem arose chiefly in relation to properties subject to tenancies which came to an end, between the date of notice to treat and the date of possession. There were conflicting decisions of the Lands Tribunal.

                5.77             Thus, for example, Banham v Hackney LBC[125] concerned a house which, at the date of notice to treat, was subject to a tenancy but by the date of entry was vacant, the landlord having terminated the tenancy. Commenting on the West Midland Baptist case, the President said:

The true view would seem to be that interests as well as values must be taken as at the date of entry unless the owner has done something which so altered the interests as to increase the burden of compensation on the acquiring authority.

The landlord’s interest was taken at its vacant possession value. By contrast, in Lyle v Bexley LBC,[126] where the tenants had been re-housed by the authority between the notice to treat and the notice of entry, it was held that the house should be valued as it stood at the date of notice to treat, that is, subject to the tenancies.[127]

                5.78             A detailed analysis, made in 1986, of these and other conflicting decisions favours the former view as better serving the principle of equivalence:

… the decided cases suggest that a result which accords with the principle of equivalence will normally result from a rule that interests subsisting at the date of the notice to treat should be valued on the basis of their  nature or extent at the valuation date… [However] the rule should not be rigidly adhered to if to do so in any particular case would produce a result at odds with that principle…[128]

This view does not appear to have been questioned in reported cases in the sixteen years since then, and it also accords to that in recent text-books.[129] We therefore propose that it should be the basis of the new Code.

Changes between notice to treat and entry

                5.79             We have commented above on the rules protecting the authority against increased compensation due to the grant of new interests after notice to treat, or improvements for the purpose of increasing compensation.[130] These rules, subject to any modifications made in the light of our recommendations, will continue to apply, but as exceptions to the general rule requiring the matter to be looked at by reference to the valuation date. Similarly, we will be proposing elsewhere that the “no-scheme rule” in its new form will apply in relation to the ascertainment of the interests to be valued.[131] Thus there will be left out of account any changes in the nature or extent of the interests which are attributable to the scheme of acquisition. This will operate as a further exception to the general rule.

                5.80             These qualifications should meet the concerns expressed in the Policy Statement:[132]

…the new legislation will also need to take account of other factors, including changes in the interests[133] and the possibility that the nature of the fixed assets may change during the period between notice to treat and the date of taking possession for reasons which have nothing to do with the compulsory purchase order and for which the acquiring authority should not therefore have to accept financial responsibility”.[134]

Different heads of compensation

                5.81             As we have explained, although divided into separate heads for the purposes of assessment, compensation is treated as a single, global figure, representing the “value to the owner” of the land at the valuation date.[135] This applies, even though some elements of the global figure will represent expenditure or losses incurred at different times, whether before or after the valuation date. It may seem anomalous for all these elements to be treated as part of a single sum, on which interest runs from a single date.

Disturbance

                5.82             Typical is compensation for disturbance, which may represent loss of profits, from the first threat of compulsory purchase until the date of effective re-establishment on a new site. The former may be some years before the valuation date, the latter some years afterwards.[136] Similarly, removal expenses, and other allowable heads of the disturbance claim, may be incurred at different times. In theory, one would expect there to be some established mechanism to enable all such items to be adjusted (upwards or downwards) to represent the equivalent sums at the common valuation date. However, there appears to be no clear guidance in the cases, nor any consistent practice among valuers.

                5.83             The problems was touched on in the West Midland Baptist case. Lord Reid, when discussing the previous use of the date of notice to treat as the valuation date for the subject land, referred to inconsistencies in relation to other heads of claim:

… there is little or no indication that [the date of notice to treat] was regarded as applicable to the other elements in an owner’s claim. These might include costs of removal, loss of profit or other consequential losses and there appears to be no suggestion in the authorities that these elements in the value of the land to the owner must be valued as at the date of the notice to treat. The actual costs or losses following on actual dispossession[137] have been taken, and that appears to be the accepted practice today with regard to claims under rule 6.[138]

Later in the same speech, having established that date of possession, rather than the date of notice to treat, should be taken as the valuation date, he said:

Sometimes possession is taken before compensation is assessed. Then it would seem logical to fix the market value of the land as at that date and to take actual consequential losses as they occurred then or thereafter, provided that the dispossessed owner had acted reasonably. But if compensation is assessed before possession is taken, taking the date of assessment can I think be justified because then either party can sue for specific performance and the promoters obtain a right to the land, as if there had been a contract of sale at that date.[139] (emphasis added)

Although the second sentence does not refer specifically to disturbance losses, the implication appears to be that they also will be “taken” as at the date of assessment, since they are in theory part of the “price” for the hypothetical contract, on which either party can sue for specific performance. In summary, losses up to the valuation date should be assessed as they occur; losses thereafter should be assessed as at the valuation date. Lord Reid said nothing about adjusting the figures to a common date.[140]

Other heads

                5.84             There are other examples. Compensation for injurious affection to retained land may relate, not to permanent reduction in land value, but to temporary loss of rental value, during the period of the works,[141] which necessarily follow the taking of possession of the land on which the works are to take place. Nonetheless, it is still treated as part of a single amount of compensation, on which interest runs from the date of possession.[142]

                5.85             The same rule as to the running of interest applies on a claim for equivalent reinstatement, where compensation is based on the cost of rebuilding on a new site, and the cost may have been incurred before or after the valuation date. For example, in one case relating to a church, possession was taken in 1974, but works to provide the replacement church did not start until 1980. Between 1980 and 1986, the council made stage payments although the church mission achieved practical reinstatement by moving into the new church in 1982. The Court held that the mission could recover interest in accordance with s 11(1) of the 1965 Act on the full amount of compensation from the time of entry in 1974.[143]

A practical approach

                5.86             The Policy Statement proposes to retain the general rule that values are taken at the valuation date, as defined in the West Midland Baptist case. Disturbance losses will be taken as they arise, beginning from the first notice date. That date will be “regarded as a baseline” and “any particular loss should only be reimbursable from the date, thereafter, on which it is first incurred”.[144]

                5.87             Neither the CPPRAG Review nor the Policy Statement address the theoretical problem of relating all these figures to a single date (at least for interest purposes). However, our researches suggest that this is not a serious problem in practice. Our review of the cases and our discussions with valuers indicate that it is unusual for any specific steps to be taken to adjust figures to a common date.[145] Market value of the subject land is assessed at the valuation date, and the other heads are assessed as they arise. Interest is payable on the global sum as from the date of entry. Any theoretical inconsistencies can be seen as part of the “swings and roundabouts” in what is inherently an imprecise exercise.

                5.88             We see no need therefore for the Code to lay down detailed rules governing the individual heads of claim. The valuer will be required to have regard to those detailed rules in arriving at a global figure of “fair compensation”. It will be a matter for valuation expertise as to how best to achieve that on the facts of any individual case. We welcome comments of consultees on whether they agree with this analysis.[146]

Equivalent reinstatement

                5.89             It is necessary to comment in more detail on the appropriate date for assessing compensation under rule (5). The present law, as established by the West Midland Baptist case,[147] is that the claim should be assessed on the basis of costs and values at the date that when reinstatement became reasonably practicable. The Policy Statement proposes a change in this respect. Having referred to CPPRAG’s endorsement of the case-law on this issue, it continues:

We agree that a consistent and realistic date needs to be defined for determining the amount payable and propose that it should be whichever is the earlier of the date on which the acquiring authority acquire ownership of the property, either in law or equity, or the date on which the authority takes possession of it.[148](emphasis added)

                5.90             From our discussions with DTLR, we understand that this proposal is intended to add precision to the West Midland Baptist case. The intention is to define the earliest date at which it would be certain that the acquisition would go ahead, and therefore at which it would be feasible for the claimant to commit resources necessary to begin reinstatement.

                5.91             However, we are not convinced that this test represents an improvement on the existing law. It is less flexible than that adopted in West Midlands Baptist, and more likely therefore to depart from reality.The commencement of works, in practice, will rarely coincide precisely with the taking of possession by the authority. It may be earlier or later, depending on the circumstances, and sometimes on the particular arrangements made with the authority. On balance we have decided to opt provisionally for the West Midlands Baptist approach in our proposal, but we invite comment from consultees on the merits of the alternative favoured by the DTLR.

Proposal 8: Date of assessment

(1) Save as otherwise provided, and subject to Proposal 7(4) above and Proposals 9 and 10 below, interests will be valued as they stand at the “valuation date”, at values prevailing at that date, and in the context of the planning and other circumstances prevailing at that date.

(2) Where compensation is assessed on the basis of equivalent reinstatement, it will be assessed by reference to the the date at which reinstatement became reasonably practicable.

Consultation issues

Do consultees agree:

                                           (1)             In relation to interests in existence at the date of notice to treat, the valuation date should be taken as the date for fixing the nature and extent of the interests?

                                           (2)             The date for equivalent reinstatement should be defined as the date at which reinstatement could reasonably begin (in accordance with the present West Midlands Baptist approach)? Or, alternatively, should it be based on making an assessment at whichever is the earlier of (i) the date on which the acquiring authority acquire ownership of the property, in law or equity, or (ii) the date on which the authority takes possession of it?

                                           (3)             There is no need for any specific provision for fixing the date of other heads of compensation, or adjusting them to a common date?

                                           (4)             Notwithstanding (3), interest should (as now) run on the total amount of the compensation from a single date (the date of possession)?