Compulsory purchase: a compensation masterclass

David Wood and Caroline Stares explore the rules underlying the assessment of compensation, the statutory heads of compensation and the controversial reforms to land valuation contained in the Levelling-up and Regeneration Act. The Levelling-up and Regeneration Act received royal assent in October 2023. Like so much planning legislation before it, LURA eschewed root-and-branch reforms to the compulsory purchase and compensation system in favour of piecemeal changes aimed at streamlining the compulsory purchase order regime. The government’s stated aim for its reforms to compulsory purchase and compensation was for a system that “acquiring authorities are confident in using” and that “produces the right outcomes” to bring forward the delivery of housing, regeneration and infrastructure.  When it comes to the thorny issue of compensation, those whose land stands to be acquired might reasonably ask “the right outcomes for whom?”, given the significant regearing of the compensation framework proposed in LURA. When rights to compensation arise A landowner whose land (or rights over land) has been compulsorily acquired has a right to claim compensation from the acquiring authority for certain losses they suffer as a result.  The assessment of compensation is governed by the compensation code.  What is the compensation code?  Despite its name, the compensation code is not a single, codified set of rules – rather it is a combination of legislation, case law and established practice. These rules have evolved over the years, so those that apply in each case will depend on the date of confirmation of the relevant CPO.  However, for many years there has been one constant principle. The amount of compensation payable has been based on the principle of equivalence – that the affected landowner should be neither financially better nor worse off because of the CPO. What compensation can be claimed? To the extent relevant, a claimant may claim under any of the following statutory heads of compensation: Open market value In the so-called “no-scheme world”, the market value of the interest being acquired; Disturbance Any losses (excluding land value) that a claimant suffers as a result of the acquisition of its land (for example, relocation costs and business losses); Injurious affection and severance These can be claimed where part of a claimant’s land is acquired and the market value of the retained part has decreased because of the scheme underpinning the CPO, or its severance from the acquired land; Various types of loss payments Fixed sums due in certain circumstances; and Fees The claimant’s reasonable professional fees. How is land value currently assessed?  Section 5 of the Land Compensation Act 1961 sets out the basic rules for assessing the amount of compensation due.  One of these rules is that the value of the land acquired is the amount that a willing seller might be expected to realise if the land were sold on the open market, subject to certain assumptions. Currently, in assessing the market value of the acquired land: No account is to be taken of any increase or decrease in the value of the acquired land owing to the scheme underlying the CPO – this is known as the “no-scheme world” principle; Account may be taken of any planning permissions for development on the acquired land or other land that subsist on the valuation date; Account may be taken of the prospect of planning permission being granted for development on the acquired land or other land on or after the valuation date – this is known as “hope value”; and It may be assumed that planning permission for “appropriate alternative development” is either in place at the valuation date or it is certain that planning permission for such development would have been granted at a later date. LURA would reform this approach to land valuation, and specifically hope value and AAD, for CPOs meeting qualifying criteria. Rationale behind the LURA reforms As is usual for the government’s interventions in the planning system, speed and efficiency are the order of the day. The government is also keen to ensure that development proposals that are reliant on a CPO remain viable and are able to deliver their promised public benefits. In connection with hope value and AAD, the government explained in its June 2022 consultation that landowners should be entitled to a fair value for any interest acquired compulsorily.  However, taking account of hope value and AAD when valuing the land acquired – rather than simply basing the assessment on existing use value – could, in its view, artificially inflate the amount of compensation payable.  This is because, for example, the current legislation requires that, where AAD is established, a valuer must assume 100% planning certainty for AAD when, in the real world, the likelihood of planning permission being granted may be no more than 51%. In pushing on with the reforms contained in LURA, the government hopes to “rebalance the position on costs and compensation between landowner and acquiring authority to a fairer one”. How does LURA look to achieve that? As LURA made its way through parliament, the government’s proposals to remove hope value from the assessment of compensation became controversial: land might already have changed hands at values reflecting hope value, resulting in a shortfall in compensation; should a landowner receive less than the market value for its interest simply because its land falls under the shadow of a CPO? LURA as made seeks to strike a compromise position. Once an acquiring authority makes a CPO it must submit it to the secretary of state for confirmation. An acquiring authority that makes a CPO using certain statutory powers may ask the secretary of state to ignore the prospect of additional planning permissions being granted when assessing compensation.  This applies where land is being acquired for health, educational and planning purposes (including the widely used and broadly applied power in section 226 of the Town and Country Planning Act 1990).  The secretary of state must then assess whether hope value should be disapplied, having regard to the public interest in doing so. Where the acquiring authority’s stated aims for the scheme underlying the CPO have not been fulfilled, additional compensation may become payable in future.  While this safeguard might provide a crumb or two of comfort for a civically minded claimant, it is likely to give rise to some uncertainty for those funding development schemes reliant on compulsory acquisition. Implications of the changes The new regime will enable acquiring authorities to have greater certainty on what the acquisition costs are likely to be for a project earlier on in the process (subject to the claw-back provisions and the proviso that the purpose for which the land is acquired is substantially delivered).  In some cases it may also improve the viability of a scheme – but it is questionable whether that increase will be material given the significant proportion of development costs over and above land value. The main concern, though, is that these new provisions conflict with the principle of equivalence. In normal market conditions, the price a buyer pays for a site will reflect the likelihood of prospective planning permission being granted (ie an element of hope value). Post-LURA, that may not be reflected in the amount an acquiring authority pays a landowner for the land taken pursuant to a CPO.  The landowner might be left financially worse off than if it had sold its land in the open market in a non-CPO world. It will also accentuate a two-tier land valuation system between those whose land falls under the shadow of a CPO and those whose land does not.  While the new regime ought to avoid the lengthy negotiations between acquiring authorities and landowners regarding the amount that should be attributed to hope value and AAD, given the financial ramifications for landowners of external use value-only-based valuation, there is a risk that more landowners will object to or challenge CPOs, which will inevitably have timing and cost implications for acquiring authorities. When do the changes come into force? While LURA made it onto the statute book at the end of 2023, the provisions bringing CPO reform to life have not yet been switched on. They will come into force on a day specified by the secretary of state in future regulations, so watch this space. What can we expect next? The changes to compensation form only a small part of a proposed wider overhaul of the CPO system. A more fundamental review by the Law Commission into the CPO and compensation regime is ongoing. Will that result in the sweeping reform some say is needed? David Wood and Caroline Stares are senior associates in the planning team at Hogan Lovells International LLP Photo © Andrea Piacquadio/Pexels