UK: Compensation Arising From A Compulsory Purchase Order

Last Updated: 20 April 2009
Article by Paul Warner

The use of compulsory purchase powers by public bodies is so Draconian that it can be expected that the law provides that anyone whose interests are adversely affected by a compulsory purchase order (CPO) should be entitled to adequate compensation.

The suite of legislation which governs compulsory purchase generally does indeed provide for payment of compensation. In addition, not only do the courts apply a presumption that a body will not be entitled to acquire property compulsorily without paying compensation, the European Convention on Human Rights has been interpreted as requiring sufficient compensation where relevant interests are lost by compulsory purchase.

The devil, of course, is in the detail. Whether a particular person's loss of property rights attributable to a CPO creates an entitlement to compensation will depend on the precise provisions of the relevant legislation. This article is intended to provide a very brief overview of some of the rules which govern the payment of compensation in Scotland.

The entitlement to compensation in respect of special matters such as injurious affection, severance and blight is not discussed in this article.

Compensatable rights

The most obvious right affected by a CPO is that of ownership of land or buildings which is appropriated by the authority making the CPO. Compensation will be due where either the whole or part of the property is taken in terms of the CPO.

Occasionally, the acquiring authority does not need to become the owner of property for the purposes of its scheme and may only require a limited right, such as a servitude right of access, to use the property instead. Compensation is thus due in respect of the acquisition of such rights falling short of ownership.

A tenant under a lease has a compensatable interest and, although the acquiring authority is not obliged to serve a notice of the making of a CPO on a tenant whose lease is for less than a year or from year to year, such a tenant is nonetheless entitled to compensation if the authority terminates the tenancy early and takes possession.

It is not only the owner and tenant of property subject to a CPO that may be entitled to compensation: any other person with a legal right to use the property , such as a person who has a servitude right over that property which will be extinguished by the CPO, and persons who are entitled to enforce title conditions affecting the property which will similarly be extinguished, may also be entitled to compensation.

Claiming compensation

Although the law requires the acquiring authority to pay compensation, it is up to the person whose interests are affected to make a claim for compensation. The confirmation of the CPO itself does not trigger entitlement to compensation since confirmation merely entitles the acquiring authority to take further steps to appropriate all or any part of the land described in the CPO. The authority makes its intention to take the required property known by serving a notice on all affected persons of its intention to vest in specific property in terms of a General Vesting Declaration (GVD), the notice inviting claims for compensation. This notice specifies the date of vesting of the GVD and it is this date of vesting which crystallizes the point at which the rights to be acquired are to be valued.

Once a claim is made, there normally follows negotiations between the authority and the affected persons but if no agreement can be reached as to the amount or basis of the valuation, the claimant has the right to refer the dispute to the Lands Tribunal for Scotland whose decision is binding unless either party has the right to appeal to the court on a point of law. However, the right to refer the dispute to the Lands Tribunal for Scotland is lost on the expiry of the period of six years from the date when the claimant knew, or ought to have known, of the date of vesting. In the small minority of cases where the acquiring authority does not use a GVD to take ownership and to acquire other rights, the period for claiming is twenty years unless otherwise provided by the governing statute.

The valuation date and ascertaining interests to be valued

Since the value of property tends to change over time, determining the date at which the interests are to be valued is very important. Where the authority is taking title to the property by way of a GVD, then the date of valuation is the date of vesting. Where a GVD is not used, the valuation date is the earlier of (a) the date when the authority takes actual possession of the land and (b) the date of assessment of the compensation by the Lands Tribunal.

As for ascertainment of the date for identifying which legal interests are to be valued, the law is less clear owing to conflicting judicial decisions. For some time, the date of the authority's notice to treat was taken as the date for fixing the interests to be valued – the notice to treat is a notice following on from a CPO which identifies the specific land and rights to be taken and which invites negotiation of the compensation: this is the notice given where a GVD is not being used to take ownership. However, this rule has been departed from on various occasions where the Lands Tribunal and the courts have preferred to refer to the date of taking possession instead.

An example of a problem in ascertaining the interest to be valued would be where a lease is terminated by a landlord after receiving a notice to treat and where the authority takes possession before the tenant makes a claim for compensation. Referring to the date of the notice to treat would give the tenant a compensatable interest (with the landlord's interest being valued subject to the lease) but, if the date of entry by the authority is used where the lease has already terminated, there is no tenancy as at that date – the tenant has no compensatable interest and the landlord's property is therefore valued assuming vacant possession.

Value of the rights to be compensated

Having identified the valuation date and the interests to be valued, the statutory basis for valuing the relevant interests must be considered. Section 12 of the Land Compensation (Scotland) Act 1963 provides six rules for the basis of determining the amount of compensation. These can be summarised as follows:-

Rule 1 - no allowance is to be made on account of the acquisition being compulsory

Although it might be reasonable to expect that the compensation payable should reflect the fact that the property is being acquired against the will of the owner, tenant or other party holding the rights, this rule specifically prevents such a factor from being taken into account. Accordingly, no compensation will be awarded in respect of any stress involved in having to give up property involuntarily.

Rule 2 - an assumption is to be made that the land is being sold on the open market by a willing seller

Compulsory purchase is usually required precisely because the party with the rights is unwilling to sell at all or is unwilling to sell at the price offered by the acquiring authority. Rule 2 attempts to create objectivity by assuming a hypothetical situation where the seller is willing to sell on the open market.

Rule 3 - any special suitability or adaptability of the land for any purpose is to be disregarded if there is generally no market for such suitability or adaptability

This rule prevents an owner of land from receiving additional compensation in respect of a feature of the land which is uniquely valuable to the acquiring authority. For example, a site's suitability for development as a hydroelectric power station will be valuable to the authority acquiring the site for that purpose but there may well be no such special value on the open market.

Rule 4 - where the value of the land is increased by any particular use which is unlawful or which causes injury to health is to be disregarded

This rather obvious rule ensures that no additional compensation is paid in respect of something which should not have been happening in the first place. This rule is most relevant where, in addition to the value of the land or buildings being acquired, compensation is being sought in respect of loss of business. The business concerned must be lawful and not injurious to health.

Rule 5 - the reasonable cost of genuine equivalent reinstatement elsewhere is to be used where the current use of the property is one for which there is no market

The effect of Rule 2 is to refer to objective evidence of what the open market would support. If there is no market data to which reference can be made, or where the property is so specialised that there is no market for it, such as in the case of a church, then Rule 5 applies and the claimant will be entitled to what would be the reasonable cost of reinstatement elsewhere.

Rule 6 - compensation may include an element for disturbance

The main compensation payable for the loss of the property rights reflects the value of those rights and does not include expenses incurred in relocating elsewhere. Rule 6 provides for reimbursement of these additional expenses, such as professional fees and removal costs.

Development value and the value of the authority's scheme

When considering what is the market value of the property being acquired, account is to be taken of any potential development value but no account is to be taken of any special increase in value attributable to the authority's proposed scheme. Although this is the effect of section 13 of the 1963 Act, this rule that any increase (or decrease) in value brought about by the scheme is to be disregarded is called the Pointe Gourde Principle, a rule clarified in a court case decided shortly after World War II. Put another way, the property is to be valued on the basis of what the property is worth to the seller and not to the buyer.

Having disregarded the effect on value caused by the scheme, it is permissible to claim for the value of a different potential development of the land – a thought process which one judge described as a 'flight of fancy'. Using the hydroelectric power station as an example, no account would be taken of any increase in value of the land to be brought about by construction and use of the power station but the claimant could claim for potential development value for residential use – if residential use would be in line with the relevant planning policy. The statutory rules import an assumption that planning permission for such an imagined development is in place provided this would be allowed in terms of the overall planning policy for the area.

There is also an entitlement to additional compensation if planning permission for additional development is obtained within the period of ten years from the date of acquisition of the land by the acquiring authority which results in an increase in the development value of the land.

Home loss payments

Where the property being acquired is an occupied house, the occupier may be entitled to additional compensation by way of a home loss payment. This payment is generally 10% of the agreed market value of the house but is subject to minimum and maximum levels specified under statute from time to time.

Restricted compensation in special cases

Although as a general rule the amount of compensation should reflect market value, including development value, there are a couple of situations where compensation is restricted.

The first is where a listed building requires to be acquired compulsorily in order to preserve the building owing to the deliberate neglect of the owner. In this case, the acquiring authority can direct that minimum compensation is payable which restricts the value to that of the building in its current state with no account to be taken of future development value.

Secondly, under Housing legislation, compensation payable in respect of a house which has had to be acquired by the local housing authority on account of the house failing to meet the tolerable standard is not to exceed the value of the land as a cleared site. However, a top-up payment is payable in order to provide full compensation where there has been continuous occupation by the entitled occupant(s) for a period of two years prior to the date when the relevant statutory order is made which ultimately results in the compulsory purchase.

Other rules

A full treatment of all of the rules governing how compensation is determined following on compulsory purchase is beyond the scope of this article. What the above demonstrates is that the ascertainment of the compensation payable is strictly governed by particular statutory rules which can vary depending on the circumstances of the case and, therefore, relevant professional assistance in negotiating the basis and level of compensation is recommended to anyone seeking compensation. The acquiring authority is bound to reimburse the reasonable professional expenses incurred by the party claiming compensation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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