UK: Railtrack "Ransom Strip" Payment Appeal Defeated By Guinness

In Railtrack Plc v. Guinness Limited, the Court of Appeal recently upheld an (until now) confidential decision made by the Lands Tribunal in 2002 that may affect parties seeking to obtain access rights across land, for example enabling redevelopment projects to go ahead.

It was revealed on Thursday 20 February that Railtrack Plc and London Underground Limited ("LUL") had demanded a £33,000,000 "ransom strip" payment from Guinness in return for granting access rights for a bridge to be built over their railway tracks at Park Royal, North West London. Herbert Smith acted for Guinness at both the Lands Tribunal and Court of Appeal stages.

The bridge was to be built and partly funded by Guinness and its development partner, London and Regional Properties. It was a necessary part of a Government "Single Regeneration Budget" publicly-funded access road supporting the regeneration of Western Park Royal area. The bridge’s purpose was to link that area direct with the A40 Westway. As the bridge would cross over Railtrack/LUL’s land, their consent was needed before the bridge could be built. However, they refused to grant access rights without payment. After failed negotiations, the matter was referred to the Lands Tribunal.

It is now possible to reveal that the Tribunal only awarded Railtrack and LUL a total of £5 million, to be shared between them. This followed a confidential 21 day hearing in 2001 that included a demand for payment by Railtrack/LUL of over £33 million, and evidence from 25 witnesses. In a 300-paragraph Tribunal decision, Railtrack/LUL were also denied their costs of the proceedings; their approach being seen by the Tribunal as "lacking restraint and judgment". Railtrack (but not LUL) appealed against the Tribunal’s decision.

The Tribunal decided the value of the access rights using a "residual valuation" approach: it assessed the hypothetical (i.e. future) value of the fully redeveloped Park Royal land assuming the benefit of the new access rights. It then deducted the likely construction and other costs needed to achieve that redevelopment. Finally, it compared that net figure with the value of the land without the access rights. The difference between those two sums was the sum attributable to the grant of the access rights, 50% of which was treated as Railtrack/LUL’s entitlement, namely £5 million.

In assessing the hypothetical value of the land, the Tribunal considered Section 5(2) of the Land Compensation Act 1961. This stated that:

"the value of the land shall… be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise" (emphasis added).

Railtrack alleged that the Tribunal had wrongly taken into account the personal attributes of Railtrack/LUL as "seller" of the access rights, when these should have been ignored for the purposes of the hypothetical transaction. The Tribunal had assumed a sale of the access rights by "a company regulated and subsidised by central government and subject to the political pressures as were [Railtrack/LUL] themselves". Railtrack alleged that the Tribunal took too much account of Railtrack/LUL’s "particular corporate characteristics and their particular financial position and control". Railtrack argued that the Tribunal should not have treated the hypothetical seller of the access rights as having any such attributes when assessing the price for which the seller would sell.

This point was especially important for Railtrack as the Tribunal had heard evidence of the commercial negotiations in 1999 that had preceded the Tribunal referral. In those negotiations, Railtrack had made an offer to sell the access rights for only £9.7 million, which Guinness had then turned down. Railtrack had then argued before the Tribunal that this had not in fact been a genuine offer at all but simply a "tactical ploy", an argument that the Tribunal rejected.

Railtrack also alleged in a second ground of appeal that the Tribunal had erred in its allowances for the developers’ profit and future risk.

Railtrack’s appeal was dismissed on both grounds and the Tribunal’s original award was upheld. The Court of Appeal supported Guinness’ response that the Tribunal was correct in taking into account the fact that the access rights were over a railway line. The Tribunal was right not to ignore the fact that the "willing seller" for the purposes of the hypothetical transaction would have to be a railway infrastructure company.

The Court of Appeal also supported the factual findings of the Tribunal that Railtrack had not, in fact, been influenced by political pressure in the negotiations anyway, and that the Tribunal could rightly take Railtrack’s £9.7m offer into account as part of their overall evaluation of the evidence.

The Court of Appeal went on to refuse Railtrack’s application for permission to appeal to the House of Lords, and awarded the costs of the appeal against Railtrack.

This appeal judgment confirms the approach that should be adopted when carrying out hypothetical valuation exercises involving the assumption of a "willing seller", and in particular the extent to which personal attributes of the parties should be taken into account. From a wider perspective, it also provides an interesting insight into the earlier Tribunal hearing and Railtrack/LUL’s stance in ransom strip negotiations.

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