England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE QBENF 96/0077/C

(Mr Justice Buckley) Royal Courts of Justice

Strand

London WC2

Thursday, 23rd October 1997

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE EVANS

LORD JUSTICE WARD

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DAVID HALSTEAD

(For himself and others, the members of the

Whalley Range Methodist Church Council and for

the Custodian Trustees for Methodist Church Purposes)

Plaintiff (Respondent)

-v-

THE COUNCIL OF THE CITY OF MANCHESTER

Defendant (Appellant)

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Handed Down Judgment prepared by

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MR C GEORGE QC and MR P KEENAN (MR T COMYN 23.10.97 only) (instructed by the City Solicitor, Council of the City of Manchester) appeared on behalf of the Appellant Defendant.

MR A GILBART QC and MR M HARPER (instructed by Messrs Pannone and Partners, Manchester) appeared on behalf of the Respondent Plaintiff.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Thursday, 23rd October 1997

LORD JUSTICE EVANS :

This appeal raises two issues regarding a claim for interest on compensation paid by an acquiring authority under the compulsory purchase legislation. The first question is whether, and if so for what period, interest becomes due under section 11(1) of the Compulsory Purchase Act 1965. The second is the date when the cause of action for statutory interest arises, for the purposes of applying the Limitation Act 1980, section 9(1).

The plaintiff sues on behalf of the Manchester and Salford Methodist Mission ("the Mission") which in 1972 was the owner of two churches, one in the Moss Side district of Manchester and the other in Whalley Range. These became known as "site B" and "site C" respectively. Both sites were included within slum clearance Compulsory Purchase Orders made by the defendants, the Manchester City Council, in 1972. Notices of Entry were served on 9 June 1972 but entry was not effected until 4 April 1974.

After much discussion, it was agreed that a single replacement church would be built on the Whalley Range site, site C, at the cost of the Council. Work started on 8 December 1980 under a contract between the Mission and the builders, and the Council reimbursed the Mission for the sums that became due under that contract and for associated professional fees and the like. The Council made 23 stage payments in all, between 24 April 1980 and 6 November 1986, totalling £718,420. The contract works were completed in February 1983, but the Mission was able to begin using the new church in 1982. The parties' final agreement as to the amount of compensation due was recorded in a letter (page 50) from the Council dated 25 November 1985.

They failed, however, to reach agreement as to what further sum, if any, was due as interest. The plaintiff's writ issued on 21 May 1990 claimed interest on the sum paid (£718,420) from the date of entry until the date of payment "namely the 6th November 1986", giving credit for each of the stage payments as and when it was made. The total claim, up to the date of the Writ, was for £783,949.68p. The Council raised a number of defences, including some which were abandoned or which failed before the judge and have not been revived on appeal.

The trial took place before Buckley J. at Manchester in December 1993. There was oral evidence on certain factual issues, as well as legal argument on the issues now raised before us.

The Council's view, ably presented by Mr Charles George Q.C., is that the Mission has no valid claim for interest on the sums which the Council has paid for reinstatement of the two churches, now combined in one modern purpose-built structure on site C. The Mission was never out of pocket in relation to the building costs, and the Council moreover has indemnified the Mission against certain bank interest which became due when its account was overdrawn. There was only a short period during which the Mission could not use a church, either the old or the new building on site C, and if it had wished to do so, it could have rented some other premises for use during that period, at a much lower cost than the interest now claimed. This represents a "windfall" for the Mission and it means, if the full amount is rightly claimed, that financially it is far better off as a result of the compulsory purchase of site B. This would be, Mr George submits, a breach of the fundamental principle of "equivalence" which requires the acquiring authority to pay as much as, but no more than, is necessary to compensate the owner for the loss of the property acquired.

Mr Gilbart Q.C. submits that the Mission clearly is entitled to recover interest under the express provisions of section 11(1) of the 1965 Act; moreover, from 1974 until compensation was fully paid the Council had the benefit both of possessing site B, which they re-developed for housing purposes, and of the amount of compensation which they were already liable to pay, notwithstanding that the amount of compensation was not established until 1985.

These submissions are not directly relevant to the correct interpretation of the statutory provisions, but they do underline why the amount of the claim is as large as it is. There was an unusually long period between the Council's entry into possession of site B (April 1974) and the agreement to build the new church on site C (1980).

The cost of rebuilding then agreed with the contractor was increased in the usual way by escalation clauses in the building contract allowing for inflation during the contract period, and the rate of inflation during that period was notoriously high. So it comes about that the cost of reinstatement under the 1980 contract, as eventually agreed in 1985, was much greater than it would have been under a contract agreed in or soon after April 1974. This highlights a fortuitous element, Mr George submits, which itself provides a reason why the present claim should not succeed.

Section 11(1) of the Compulsory Purchase Act 1965 provides as follows :-

"S.11 Powers of entry

(1) If the acquiring authority have served notice to treat in respect of any of the land and have served on the owner, lessee and occupier of that land not less than 14 days notice, the acquiring authority may enter on and take possession of that land, or of such part of that land as is specified in the notice; and then any compensation agreed or awarded for the land of which possession is taken shall carry interest at the rate prescribed under section 32 of the Land Compensation Act 1961, from the time of entry until compensation is paid, or is paid into court in accordance with this Act . . . . . . . . . . . . . .

(2) The acquiring authority may also enter on and take possession of any of the land by following the procedure in Schedule 3 to this Act . . . . . . . . . . . . . . . . . (4) Except as provided by the foregoing provisions of this section, the acquiring authority shall not, except with the consent of the owners and occupiers, enter on any of the land subject to compulsory purchase until the compensation payable for the respective interests in that land has been agreed or awarded, and has been paid to the persons having those interests or had been paid into court in accordance with this Act."

Reference should also be made to section 5 of the Land Compensation Act 1961 :-

"s.5 Rules for assessing compensation

Compensation in respect of any compulsory acquisition shall be assessed in accordance with the following rules:

. . . . . . . . . . . .

(2) The value of land shall, subject as hereinafter provided, be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise :

. . . . . . . . . . . .

(5) Where the 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 :

(6) 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 :

. . . . . . . . . . . . ."

Essential to Mr George's submission is some understanding of the alternative bases for assessing compensation under section 5 : rule (2) (open market value) and rule (5) ("reasonable cost of equivalent reinstatement"). Rule (5) applies when there is no general demand or market for land used for the purpose to which the acquired land is being put (and would have continued to be put) and there is a bona fide intention to reinstate (sc. use for the same purpose) "in some other place". In such circumstances, there is no "open market value" for the land for its continued use for the purpose in question, although it could be said that the land itself has a market value, in the present case a mere £8000. The measure of compensation may then be equivalent to the reasonable cost of reinstatement, although in deciding whether or not rule (5) applies the rule (2) open market value (for some other purpose) should not be ignored : Harrison & Hetherington v. Cumbria C.C. (1985) 50 P & CR 396 at 397.

The underlying principle of equivalence is clearly established by the House of Lords' decision in Birmingham Corpn. v. West Midland Baptist (Trust Association Inc. (1970) A.C. 874 where it was held that the correct date for assessing the value and therefore the amount of compensation (unless previously agreed or assessed) is the date of entry rather than, as previously supposed, the date of the earlier notice to treat. This ruling was found to be necessary in order to avoid great injustice to the landowner at a time of rising land values (per Lord Donovan at 910 and per Salmon L.J. [1968] 2 Q.B. at 210-1).

Undoubtedly, the same principle gives rise to the statutory right to interest under section 11(1). This is made clear by Lord Nicholls' speech in Director of Buildings and Lands v. Sheen Fung Ironworks Ltd [1995] 2 AC 111 at pp. 125 and 139. Since neither the principle nor its specific application in relation to interest are challenged in this appeal, it is unnecessary to quote the relevant passages here.

Mr George's submission is that there is no scope for a claim for interest in a reinstatement (rule (5)) case. The acquiring authority pays for the reasonable cost of acquiring other land which can be used for the same purpose as the acquired land. The owner of the land is never out of pocket as regards the costs of reinstatement, and if he incurs costs during the intervening period between being deprived of the acquired land and obtaining possession of other equivalent land, then he is entitled to recover these as compensation for disturbance under rule (6). The situation therefore is quite different, he submits, from "open market value" compensation paid under rule (2), where the landowner clearly should be entitled to be paid the value of the land from the moment he is dispossessed, for the reasons expressed in the West Midlands case, and to recover interest as compensation for any delay in payment thereafter. No question regarding interest arose in West Midlands , where "the claimants had been allowed to remain in possession on the terms that they claimed no interest on the compensation and paid no rent" (Headnote, [1970] A.C. at 875A).

The appellants acknowledge that on a literal reading of section 11(1) the claim for interest does arise ; the amount of "any compensation agreed or awarded for the land . . . shall carry interest . . . from the time of entry until the compensation is paid . . . ". If the claim is allowed on this basis, however, the claimant in a rule (5) case receives a windfall benefit in excess of what is necessary to compensate him for his actual loss, and so the principle of equivalence is breached. The appropriate result can be achieved, Mr George submits, in any of three ways, which in the circumstances is a proper interpretation of section 11(1).

First, by limiting the award of interest to an amount calculated by reference to the open market value of the land, as if it was a rule (2) case. Even this would give the claimant some additional benefit, because in a case of prompt reinstatement he would suffer no financial loss at all.

The judge rejected this submission on the ground that it would be inconsistent with rule (5) to assess section 11 interest as if it was a rule (2) case. In my judgment, he was right to do so, for the reason which he gave. Although regard must be had to rule (2) in deciding whether or not compensation is payable under rule (5), the decision or agreement that rule (5) does apply cannot be re-opened, in my view, for the purpose of assessing what interest is payable under section 11(1).

Mr George's second submission is that the costs of reinstatement, which in fact were incurred between 1980 and 1986, by reference for the most part to the terms of a contract agreed in 1980, should be "discounted" to an equivalent figure which would be valid for the date of entry in April 1974. Discounting implies that the actual figure is reduced by the reverse application of an appropriate annual percentage figure. This is therefore precisely equivalent, if an interest rate percentage figure is used, to negativing an award of interest in respect of the period between the date of entry and the payment of compensation ; yet the right to such an award is what the claimant is given by section 11(1).

The judge held that this too would be "contrary to the clear words of section 11", and again I agree with him. The appellants submit that he failed to appreciate that the reason for the discounting was to seek to achieve fairness and equivalence, and the pivotal role of the date of valuation i.e. the date of entry in the context in which section 11 was enacted. This however merely restates the windfall argument which, in my judgment, itself begs the question whether section 11(1) does give the claimant a right to interest from the date of entry in a rule (5) reinstatement case.

Finally, Mr George suggests an approach which was not put forward below. This would involve both discounting the agreed figure to a 1974 value and also deducting "the difference between the compensation already paid and the discounted amount". This seems to me, if I have understood it correctly, to deprive the claimant twice over of the right to claim interest on the discounted figure in respect of the period between the date of entry and the payment of compensation which is given to him by the express words of section 11(1). I would reject this suggestion also.

Mr George referred a number of reported rule (5) cases where a claim for interest may have arisen but was nowhere referred to ( Lane v. Dagenham Corporation (1961) 12 P & CR 374 Cunningham & Ors. v. Sunderland C.C. (1963) 14 P & CR 208 and Trustees of Nonentities Society v. Kidderminster BC (1971) 22 P & CR 224) and to Aston Charities Trust Ltd. v. Stepney Corpn. (1952) 2 P & R 289 where passing reference was made to the question of interest in a Lands Tribunal judgment (see p.295). He did not suggest, however, that there is clear guidance in any of the authorities on the issue as to the application of section 11(1) in a Rule (5) case which we have to decide.

I therefore would uphold the judge's ruling that the Mission is entitled to recover interest in accordance with the express terms of section 11(1), that is to say, on the amount of compensation which was agreed, from the time of entry in 1974. The essential answer to the "windfall" objection, in my judgment, is that the amount of interest depends upon the value given to the land by rule (5) and the length of the period from the time of entry until reinstatement; in other words, the period during which the claimant is dispossessed. During that time, and possibly thereafter (how long the period continues is the second question raised under this head), he has neither the land nor its value, and he is compensated for non-payment of its value by the award of interest ; the classic function of such an award ( Riches v. Westminster Bank Ltd. [1947] AC 390). It is relevant also that during the same period the acquiring authority is free to use the land for its own purposes, and if the appellants are correct it would also retain for its own benefit the compensation due to the claimant for the land. In my judgment, that would breach the principle of fair compensation or equivalence, rather than the reverse, as Mr George submits. As regards the suggested discounting exercise, to 1974, this overlooks the fact that discounting is the accepted method of adjusting the value of money over a period, to take account both of inflation and its earning capacity (interest rates). The discounted 1974 figure is not the real equivalent of the amount agreed in 1985.

Interest is payable under section 11(1) "until the compensation is paid". The compensation due in the present case was measured by the cost of reinstatement (rule (5)) which was paid in instalments between 1980 and 1986. Meanwhile, in October 1982 the Mission achieved practical reinstatement by moving into the new church on Site C. Mr George submits that this marks the end of the period during which interest should run. The Mission was reinstated in equivalent land, and it had no liability for the cost of reinstatement against which it was not entitled to be indemnified by the Council. The builders effectively were paid by the Council direct.

The fact remains, however, that section 11(1) provides that the right to interest continues until the compensation is paid. I do not see how these express words can be read as meaning "until reinstatement takes place". In a case where the claimant has contracted with, and therefore is liable to, the builder of new premises, he remains under that liability until the price is fully paid. His right to receive compensation from the acquiring authority is independent of his relations with the builder, and if compensation is due but unpaid, then there is no reason why interest should not be paid as compensation for late payment. Conversely, the authority has the use of the money until such time as payment is made.

I would hold, again in agreement with the judge, that the clear wording of section 11(1) applies.

Section 9(1) of the Limitation Act 1980 reads as follows :-

"(1) An action to recover any sum recoverable by virtue of any enactment shall not be brought after the expiration of six years from the date on which the case of action accrued".

There is no appeal from the judge's decision that this provision governs the claim for interest made under section 11(1) of the 1965 Act in the present case.

The issue raised before us was whether the Mission's cause of action accrued when the amount of compensation was agreed, vis. 25 November 1985, or pro rata on the date when each instalment was paid, vis. between 1980 and 1986.

The writ was issued on 21 May 1990. If the former view is correct, then there is no limitation defence. If the second view is correct, as the Council submits, then the claim is statute-barred save as regards interest (to the date of the final payment) claimed in respect of the last three payments, which were the only ones made after 21 May 1984, six years before the writ was issued.

The payments were described as "payments on account of compensation payable for the property . . . . in accordance with Rule V of section 5 of the Land Compensation Act 1961". It is common ground that no payment was made on account of the claim for interest. This claim was raised when the amount of compensation was discussed. The judge found that overall agreement on compensation was not reached until November 1985. He also found that "the question of the Mission's statutory right to interest, a legal point" was expressly reserved at a meeting held on 29 January 1981. The Mission's representative's note of the meeting was that the parties agreed not to hold up reinstatement on this point which was basically a matter of law, and the judge recorded that the Council's witness accepted the note "as likely to be accurate and in accordance with his general recollection of what was agreed at the time".

There is no finding that the parties agreed, at any time, to extend the time within which interest might be claimed. No such agreement was alleged.

Mr George submits that there was agreement by 29 January 1981 at the latest about the base-cost of reinstatement, which would be adjusted in accordance with the terms of the building contract up to such time as the final settlement took place. He contends that each instalment was a part-payment of this amount and that the Mission could have put forward an unanswerable claim for interest due in respect of each payment as it was made.

In my judgment, however, the statutory right to recover interest does not arise until the amount on which interest becomes due is awarded or agreed. That is the amount on which interest is payable, and the clear intention is that the right to interest will compensate the claimant for non-payment during the intervening period. The judge's finding that there was agreement on but not before 25 November 1985 therefore precludes the Council from asserting that agreement was reached at some earlier date. I would hold that the claim is not statute-barred.

I should also refer to correspondence which took place in July, following the judgment of Mr Stanley Burnton Q.C. (Deputy Judge) in London Borough of Hillingdon v. ARC Ltd. (unreported 12 June 1997). By letter dated 2 July, Mr George sent us copies of this judgment and of the Court of Appeal's judgment in Moore v. Gadd (5 February 1997, reported in The Times Law Reports on 17 February 1997) which is referred to in it. These were concerned with the date when the cause of action for compensation accrued. Mr Gilbart replied that his submissions were not concerned with the right to recover compensation as distinct from the statutory right to recover interest. He also submitted that the Deputy Judge's judgment was wrong. Mr George by a further letter dated 16 July confirmed that the right to compensation is not in issue in the present case and that he had referred to the Hillingdon case only in relation to the narrow issue whether it is necessary for the quantum of principal/compensation to have been agreed before time can run ; for this reason, he did not reply to Mr Gilbart's submissions in detail. As already indicated, the statutory right to interest arises, in my judgment, when the compensation is awarded or agreed, and it then becomes payable in respect of the intervening period after the date when entry occurred. That is what section 11(1) says. The Deputy Judge's judgment and Moore v. Gadd were not concerned with such a claim.

It is therefore unnecessary to say more about these judgments than that we are grateful to counsel for their further assistance.

For the reasons given above, I would dismiss the appeal.

LORD JUSTICE WARD :

I agree.

LORD JUSTICE NOURSE :

I also agree.

Order: appeal dismissed with costs; leave to appeal to the House of Lords refused.