Service Welding Ltd v Tyne and Wear County Council

Compensation for acquisition of factory by agreement–Compulsory purchase basis of compensation–Claimants in order to mitigate loss purchased an alternative site and erected new factory–Main items of compensation agreed but dispute as to claim under heading of disturbance for bank interest and charges on overdraft–Amount claimed as directly flowing from acquisition–Whether interest and bank charges should be regarded on the other hand as part of purchase price of new factory–Whether claimants received value for money in return for such expenditure–Latter view held to be correct and appeal from the Lands Tribunal allowed This was an appeal by case stated from a decision of the Lands Tribunal (Victor Wellings QC) holding that the claimants, Service Welding Ltd, were entitled to compensation from the acquiring authority, Tyne and Wear County Council, under the heading of disturbance, for expenditure incurred in meeting bank interest and charges on an overdraft used to finance the construction and equipment of a replacement factory. The Lands Tribunal decision was reported at (1978) 245 EG 143, [1978] 1 EGLR 157. Alan P Fletcher (instructed by Sharpe, Pritchard & Co, agents for John E Hancock, solicitor to Tyne and Wear County Council) appeared on behalf of the appellants (the acquiring authority); Michael Mann QC and Daniel Robins (instructed by Ingledew, Mark Pybus, of Newcastle upon Tyne) represented the respondents (claimants). Giving the first judgment at the invitation of Megaw LJ, BRIDGE LJ said: This is an appeal by case stated from a decision of the Lands Tribunal given by Victor Wellings QC on October 6 1977. The matter came before the tribunal on an agreed reference to determine the amount of compensation payable by the appellant acquiring authority, the Tyne and Wear County Council, for the acquisition of the claimants’, Service Welding Ltd’s, factory premises in Newcastle. There had been an agreement between the claimants and the acquiring authority (as I shall call them respectively) to sell the claimants’ premises to the acquiring authority on the terms of a notional compulsory acquisition pursuant to a notice to treat deemed to have been served on July 4 1973. Having concluded that agreement, and faced with the prospect of losing their existing factory premises, the claimants, who wished to continue to carry on their business and to avoid a disturbance claim for the loss of the goodwill of the business, set about finding themselves alternative factory premises. They were, in the event, unable to purchase a factory ready for occupation, but they found a suitable site where a new factory could be built on an industrial estate known as the Brunswick Estate at a place called Wideopen. They acquired the new site some time in the latter part of 1973, and employed building contractors to erect a factory for them; and the new factory was ready for their occupation in July 1974 when they moved into it. The premises in Newcastle which were being acquired were handed over to the acquiring authority in September 1974. The main items of compensation payable by the acquiring authority to the claimants were agreed as follows. It was agreed that the market value of the Newcastle factory on September 19 1974, the date when the acquiring authority took possession and the date taken as the appropriate valuation date, was £38,250. Compensation for losses incurred on disturbance, on a wide variety of miscellaneous items of a kind very familiar in claims of this kind, was agreed at the sum of £14,149. Because there was an interval of time between the vacation of the Newcastle factory and the date when the acquiring authority took possession of it, from which date interest on the compensation would run, a further sum was agreed as payable for disturbance, representing interest, I suppose accruing between July 24 and September 19, namely, £1,065. Those amounts together made up an aggregate of £53,464. The additional sum claimed by the appellants by way of disturbance compensation arises out of circumstances which are thus summarised in the agreed statement of facts which was the basis of the reference to the Lands Tribunal: 5. The claimants’ business was financed in part by bank overdraft secured by a charge over the subject property. That is a reference to the Newcastle factory. The bank was willing to provide additional facilities to finance the cost of purchasing the new site that is, the site on the Brunswick Estate and the erection thereon of the new factory which finance was secured by a charge over the new site which was to be redeemed (in part) by the proceeds of the sale of the subject property. In order to facilitate the recording of the finance costs attributable to the purchase of the new site and the erection of the new factory, the claimants opened a separate ‘reinstatement account’ with the bank to which was debited all the costs incurred in the purchase of the new site and the erection thereon and making ready for occupation and use of the new factory. Central government grants were made towards the cost of erecting the new factory equal to 22 per cent of certain qualifying expenditure. These were applied for and paid at appropriate intervals during the course of the erection of the new factory and the sums received were credited to the reinstatement account thus reducing pro tanto the finance costs. The first debit to the reinstatement account which was presumably the date when the claimants acquired the new site was made on September 17 1973. On the basis of that history, paragraph 8 of the agreed facts sets out the claimants’ contentions. The claimants contend that they are entitled to be paid as part of their loss on disturbance and in addition to the sums totalling £15,214 under paragraph 7(2) above a sum equal to the cost (bank interest and charges) of financing the capital progressively laid out on the new site and factory (after crediting the central government grants) throughout the period between September 17 1973 (when the first debit to the reinstatement account was made) until July 24 1974 when the new factory was ready for occupation and occupied. Because the new factory is larger than the subject property the ascertainment of these finance costs involves a scaling down of the reinstatement account overdraft and of the central government grants to reflect a notional expenditure on a new factory equivalent to the subject property. 37 At the end of the agreed statement of facts for the tribunal there were set out three alternative calculations of the appropriate amounts of interest payable on borrowed money for which the claimants would be entitled to compensation according to three different contentions. I need only read the first, because this is the basis on which the Lands Tribunal decided that the claimants were in fact entitled to compensation, namely, on the footing ‘As if (as the claimants primarily contend) the total expenditure on the new factory (excluding bank interest) had never exceeded a sum of £58,509 being a sum which it is agreed would have been the cost of building and equipping a new factory of equivalent size with equivalent equipment to’ the old Newcastle factory. On that basis it was agreed that the amount of interest claimable would be £4,285. The issue was described as a preliminary issue for the Lands Tribunal and was referred to the tribunal on the footing that it was purely a question of law. This assumption was challenged by the member in the course of giving his decision. He said this: During the argument I expressed strong doubt as to whether the preliminary issue was a question of law at all and threatened to adjourn this matter and fix a date for the hearing of the reference in order to enable the parties to call evidence including, if they so desired, expert evidence. I was asked by counsel for the parties, in order to save costs, not to take that course but to resolve the matter as best I could. In order to assist me in that course they came to certain further agreements as follows: (1)  That in any building project there are four elements in the cost of the completed building: (a) the cost of the site; (b) payments to the building contractor; (c) architect’s and other fees; (d) interest charges or loss of interest on all the first three elements. (2)  That the tribunal (that is to say I) as arbitrator, should be at liberty to draw any inferences it might think necessary from the agreed facts or any of them, including the four elements stated above, and should be treated as empowered by the agreement dated July 4 1973 to use my own expertise and draw such conclusions as to what a purchaser might take into account with respect to the value of the new factory as the tribunal might think fit and to use judicial knowledge in the widest possible manner. I heard very little argument as to which of the three bases of assessment would be correct if I came to the conclusion that the claimants were entitled to compensation under this head. I heard no argument in respect to the third basis except that Mr Robins said that it was an impossible basis. Then there is the crucial paragraph: There is no doubt that in purchasing the new site and erecting and equipping the new factory the claimants were mitigating their loss and taking reasonable steps to do so. In my opinion, whether or not the expenditure in question flowed directly from the taking, it, in so far as it was reasonable in amount, flowed directly from the mitigation: see Halsbury’s Laws of England, 4th ed, vol 12, para 1193. In the circumstances the claimants are, in my judgment, prima facie entitled to compensation for at least some of the expenditure. There is, I believe, no presumption, either of law or fact, that the claimants have received value for money expended. I am unwilling to make any assumption as to what a prospective purchaser or vendor would take into account in the matter of bank interest and charges except that I think it is likely that the value of the new factory would be precisely the same whether or not any bank interest and charges had been paid. It appears to me that the preliminary issue is more properly one of fact and degree and perhaps expert evidence rather than of law. I have not been satisfied that the claimants received value for money for the interest and charges paid away. Accordingly I shall decide the issue in favour of the claimants. The decision goes on to opt in favour of the first of the three alternative bases of quantification. The formal case stated for the opinion of the court sets out two questions on which our decision is invited. First: Whether there was in law a presumption that the claimants had received value for money in respect of bank interest and charges paid by them in respect of a bank overdraft with the aid of which they caused to be erected and equipped a replacement factory: if yes, whether the said presumption was rebuttable or irrebuttable. Secondly: If the presumption was rebuttable whether, having regard to the agreed facts and other agreements mentioned in my said decision, and having regard to my findings on p 5 with respect to mitigation of loss, I was justified in holding: (i)  that the claimants were prima facie entitled to compensation for at least some of their expenditure on bank interest and charges; (ii)  that the first of the three agreed bases of compensation should be applied. The principles on which compensation for a compulsory acquisition in such circumstances as these is to be quantified are very well known and are not in dispute. This is a case governed by rules (2) and (6) of the rules for assessing compensation set out in section 5 of the Land Compensation Act 1961. Rule (2) provides: The value of land shall, subject as hereinafter provided, be taken to be the amount which the land if sold on the open market by a willing seller would be expected to realise. That element, of course, is the subject of agreement in the sum of £38,250 for the acquisition of the old Newcastle premises. Rule (6) provides: The provisions of rule (2) shall not affect the assessment of compensation for disturbance or any other matter not directly based on the value of land. It is pertinent to point out that this is not a case to which rule (5) has any application. Rule (5) is the rule which provides that in certain circumstances where land is acquired of a kind for which there is no general demand or market the acquiring authority is to compensate the landowner on the basis of the reasonable cost of equivalent reinstatement. It is well established that in a case governed by rules (2) and (6), in addition to receiving the value of the property which is taken from him, a dispossessed owner is also entitled to all the costs which reasonably flow from the fact of his disturbance. The principle is clearly stated in a passage, particularly relied on by Mr Mann for the respondents, from the judgment of Romer LJ in this court in Harvey v Crawley Development Corporation [1957] 1 QB 485. The passage in question is at p 494: It seems to me that the authorities to which our attention was drawn do establish that any loss sustained by a dispossessed owner (at all events one who occupies his house) which flows from a compulsory acquisition may properly be regarded as the subject of compensation for disturbance, provided, first, that it is not too remote and, secondly, that it is the natural and reasonable consequence of the dispossession of the owner. Where the premises compulsorily acquired are occupied by the landowner for business purposes, the potential disturbance compensation is, of course, represented by the possible extinction of the business and a large sum which in that event would be payable to a business occupier for the loss of his goodwill. But it is clear that where, as here, a business occupier is in a position to find alternative accommodation in which to carry on his business and prevent its extinction, he is under a duty to mitigate his disturbance compensation by removing his business to the alternative accommodation. What the authorities (to which I need not refer in detail) very clearly establish, however, is that when an occupier, whether residential or business, does, in consequence of disturbance, rehouse himself in alternative accommodation, prima facie he is not entitled to recover, by way of compensation for disturbance or otherwise, any part of the purchase price which he pays for the alternative accommodation to which he removes, whether that accommodation is better or worse than, or equivalent to, the property from which he is being evicted. The reason for that is that there is a presumption in law, albeit a rebuttable presumption, that the purchase price paid for the new premises is something for which the claimant has received value for money. If he has made a good bargain and acquired premises which have a38 value in excess of what he has paid for them, that is not something for which the acquiring authority is entitled to any credit. If the claimant has made a bad bargain and has paid a great deal more for the new premises to which he is moving than they are really worth, that is not something for which the acquiring authority can properly be charged. As Mr Fletcher, for the appellant acquiring authority, illustrated to us, this presumption is, of course, rebuttable. There may be circumstances in which, for example, the displaced claimant, in order to render the new premises which he acquires suitable for his own purposes, must expend money on adapting them in a way which will not enhance their value. In those circumstances, the cost of adaptation would properly be recoverable as part of his disturbance compensation. The real question which arises in this appeal is whether, in the circumstances described in the agreed facts to which I have made reference, the interest charges payable by the claimants on the cost of acquiring the site and on the stage payments that they made to their building contractors during the building of their new factory are properly to be regarded as part of the purchase price of the new premises, to which the presumption applies that the claimants received value for their money, as Mr Fletcher contends; or whether, as Mr Mann submits for the respondent claimants, this was an item of expenditure for which no value was received by the claimants, an item of expenditure which flowed as a natural and reasonable consequence of their dispossession from the Newcastle factory, analogous to interest payable upon a bridging loan by a dispossessed owner who is forced to acquire new premises before he is in a position to move into them and before the acquiring authority acquires his old premises from him and becomes liable to him to pay interest on compensation moneys. I hope I shall not be thought disrespectful to the arguments of learned counsel on either side if I say that their succinct submissions have demonstrated to me that the point is a very short one which admits really of no elaboration of argument either way. In a sense it is a matter of pure impression. Given the agreed facts, in particular the facts which were agreed as supplementary to the original agreement and which are set out in the passage from the Lands Tribunal decision which I have read, as to what are the necessary elements in the cost of erecting a new building, it seems to me perfectly clear that interest charges incurred in the circumstances in which the claimants’ interest charges were incurred here are part of the costs necessarily incurred in producing as an end-product factory premises ready for occupation as such, where the intending occupier has built the factory for himself. It seems to me that in those circumstances those charges are properly to be regarded as part of the purchase price paid by the factory owner for the factory which he has built for himself. One can test that view by considering the position which would arise if, instead of acquiring a site for himself, and himself undertaking the cost of building a factory upon it, the claimant, displaced from his old factory, had found a developer who had erected a factory on a site on a speculative basis. There is no doubt, in my judgment, in those circumstances, that the developer, willing to sell his newly completed factory to the would-be occupier, would base his asking price on the various elements of cost which he, the developer, would have incurred in producing the factory; and one of those items of cost would have been the interest charges or loss of interest on the other elements making up the overall cost of producing the factory. Of course, he might not succeed in getting his asking price. He might be forced into selling at a loss. On the other hand, he might be fortunate and sell at a profit. But in any view he would include the interest charges as part of the cost of producing the end-product. Where the intending occupier, as here, instead of going into the market and finding a developer ready to sell him a finished product, has himself incurred the various elements necessary to be incurred in the production of that finished product, I can see no reason whatever why any one of those necessary elements of cost should be treated as other than part of the purchase price of the end-product, to which the presumption–the well-established presumption–in law that he receives value for money in my judgment applies. Accordingly, I would allow this appeal; and, turning to the questions in the case stated, I would answer the first part of the first question in the affirmative: that there was in law a presumption that the claimants had received value for money in respect of the bank interest and charges paid by them. It is academic, but one must say that, technically, that presumption was rebuttable. Turning to the second question, the presumption being rebuttable, having regard to the agreed facts and the other agreements mentioned in the tribunal’s decision, and the tribunal’s findings with respect to mitigation, I reach the conclusion, with respect to him, that the member of the tribunal giving the decision was not justified in holding that the claimants were entitled to compensation for any part of their expenditure on bank interest and charges. Accordingly, the question as to which of the three agreed bases of compensation would have been appropriate had they been so entitled does not arise. I would allow the appeal accordingly. Agreeing, TEMPLEMAN LJ said: The Newcastle factory was owned and occupied by the claimants and it was compulsorily acquired. Under rule (2) of section 5 of the Land Compensation Act 1961, the claimants became entitled to the amount which the Newcastle factory, if sold in the open market by a willing seller, might be expected to realise. Of course, the claimants cannot have it both ways. If they are compensated by being paid the value of the Newcastle factory, they cannot be compensated in addition by being paid part of the price of the new factory. What they are entitled to, in addition to the value of the land under rule (2), is the assessment of compensation for disturbance under rule (6), the compensation, as I understand it, being the costs and losses caused by their having to get out of the Newcastle factory and having to get into the new factory. The claimants, as they were entitled but not bound to do, looked round and found a site which they acquired, and, as they were entitled but not bound to do, they made arrangements for the site to be developed into a new factory and to pay the costs of that being done. In the course of so doing, as they were entitled but not bound to do, they paid certain moneys on account and borrowed moneys for that purpose. It seems to me that the moneys which they raised and the interest thereon for which they became liable were not the costs of being disturbed from the old factory and getting into the new factory: they were the costs of acquiring the new factory. Accordingly, in my judgment, they fall neither under rule (2) nor under rule (6); and I would agree with the order proposed by my Lord. MEGAW LJ agreed with both judgments. The appeal was allowed with costs. The acquiring authority was also awarded costs of the reference from February 18 1977, the claimants to have the costs of the reference up to that date. Leave to appeal to the House of Lords was refused. The effect of the court’s answers to the specific questions stated for their opinion was as follows: (1)   There was in law a presumption that the claimants had received value for money in respect of bank interest and charges on an overdraft used to aid the erection and equipment of a replacement factory; (2)   This presumption was rebuttable; (3)   The claimants were not prima facia entitled to compensation for at least some of their expenditure on bank interest and charges; (4)   The question as to the basis of compensation for such expenditure did not, therefore, arise.