England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LANDS TRIBUNAL

		Royal Courts of Justice Strand London WC2 Monday, 19th February 2001

1. LORD JUSTICE CHADWICK: Judgments in this appeal were handed down on 21st December 2000. The court indicated that it would allow the appeal in three respects: (i) by substituting the figure of £5 in place of £3.75 as the income per sheep from skins in the computation of notional income to be derived from the slaughterhouse business formerly carried on by the appellant; (ii) by substituting the figure of £1.50 in the place of £1 as the income per sheep "from other parts" in the same computation; and (iii) by awarding simple interest on the amount of the compensation payable as determined by the Lands Tribunal, after taking into account those adjustments and the further adjustment resulting from the disallowance of £14,365. That sum had been included by the Member in respect of accrued interest on a business development loan. He held that that amount should be disallowed in the circumstances that there was to be an award of interest on the whole of the compensation, for the reasons set out in the judgment which I handed down.
2. We indicated – as a provisional view only and subject to any further submissions – that we were minded to award interest at the commercial court rate. We invited the parties to attempt to agree the computational adjustments resulting from our decision in relation to the matters which I have described under (i) and (ii); to agree, if they could, the rate of interest that should be adopted; and to agree the amount of interest to be awarded on the basis of the rate agreed (if any), or, prospectively, on the basis of the rates for which the parties each contended.
3. We have now had the benefit of the parties' further submissions on those matters which were left for agreement or determination following our judgments of 21st December. The amount of the compensation awarded by the Lands Tribunal was £417,904. After deduction of the £14,365 in respect of the interest which had accrued on the business development loan, that sum reduces to £403,539. The adjustments to be made in respect of the income from skins and other parts have been agreed, as I understand the position, at £243,000. So the figure upon which interest is to be paid is the aggregate of £243,000 and £403,539, a total of £646,539. Of that amount, £417,904 was paid on 14th January 1999 following the determination by the Lands Tribunal. A further £254,002 was paid on 31st January 2001 following the judgment of this court on 21st December 2000. That sum was paid on account of interest but after the retention of income tax at a rate of 20 per cent on such interest. The remaining issue upon which the parties have not agreed is as to the rate at which interest is to be paid on the amount of £646,539. There is a subsidiary point as to the date from which that interest should run.
4. It is submitted on behalf of the South Bedfordshire District Council that the appropriate rate is that prescribed by section 32 of the Land Compensation Act 1961. The section is in these terms:

"The rate of interest on any compensation in respect of the compulsory acquisition of an interest in any land on which entry has been made before the payment of the compensation shall (instead of being the rate of 5 per cent specified under section 85 of the Lands Clauses Consolidation Act 1845) be such rate as may from time to time be prescribed by regulations made by the Treasury."

5. That section has now to be read in conjunction with section 80 of the Planning and Compensation Act 1991. Subsection (1) of section 80 provides that:

"Compensation payable under any provision mentioned in column 1 of an entry in Part I of Schedule 18 to this Act shall carry interest at the rate for the time being prescribed under section 32 of the Land Compensation Act 1961 . . . from the date shown against that provision in column 2 of the entry until payment."

6. Schedule 18 there referred to contains in column 1, amongst other entries, a reference to section 115 of the Town and Country Planning Act 1990. The date from which interest is payable in relation to compensation under that section is the date damage was suffered for expenses incurred.
7. The relevant regulations made by the Treasury under section 32 of the Land Compensation Act 1961 are the Acquisition of Land (Rate of Interest after Entry) Regulations (SI 1995 No.2262). As appears from regulation number 2 of those regulations, the prescribed rate of interest, where those regulations are applicable, is O.5 per cent below the base rate quoted by the reference banks. In that context, the reference banks are the seven largest banking institutions authorised by the Bank of England under the Banking Act 1987. In effect, therefore, what I may describe as "the land acquisition rate" of interest is one half of one per cent below bank base rate; a rate which is significantly lower than the rate at which most commercial operations would be able to borrow.
8. Figures produced by the District Council indicate that the amount of interest, if it had been paid on 31st January 2001 at the land acquisition rate, would have been £564,808. That represents the aggregate of the interest at the land acquisition rate from 7th August 1989 until 13th January 1999 on the whole sum of £646,539, and from 14th January 1999 until 31st January 2001 on a sum of £228,635, that being the balance of £243,000 payable in respect of skins and other parts, after deducting the £14,365 which was disallowed in respect of accrued interest on the business development loan. It is clear, therefore, that there is, on any basis, a substantial amount of interest to be paid.
9. It is accepted by the District Council that section 32 of the Land Compensation Act 1961 and the Acquisition of Land (Rate of Interest after Entry) Regulations 1995 have no direct application in the present case. The reason why they do not is explained in paragraphs 41 to 43 of the judgment which I delivered on 21st December 2000. Put shortly, section 80 of the Planning and Compensation Act 1991, which alone makes section 32 of the Land Compensation Act 1961 applicable in cases where the land is not compulsorily acquired - and, in particular, makes section 32 of that Act applicable to compensation payable under section 115 of the Town and Country Planning Act in respect of damage suffered by reason of a discontinuance order made under section 102 of the 1990 Act - does not apply where the relevant order is made before 25th September 1991. It does not apply in the present case because the discontinuance order, which has given rise to the damage in respect of which compensation is payable to Mr Aslam, was made on 14th October 1988 under section 51 of the Town and Country Planning Act 1971 and confirmed by the Secretary of State on 26th July 1989. The order took effect following confirmation from 7th August 1989. Compensation in this case is payable under section 170 of the 1971 Act.
10. Nevertheless, it is said that Parliament, by enacting section 80 of the Planning and Compensation Act 1991, has shown that a rate which is below the commercial rate of interest is to be adopted when land is acquired in the public interest or, as it is said in this case, where the use of land is prohibited by a discontinuance order made in the public interest. The argument – and it is an argument which has force – is that Parliament having addressed its mind to that question in 1991 the courts ought to follow the lead which Parliament has given. It might be said, of course, that, when addressing its mind to that question in 1991, Parliament did not think it necessary to make the provisions retrospective.
11. The position in the present case, as I sought to explain in paragraph 50 of the judgment which I delivered on 21st December 2000, is that interest is payable under section 19A of the Arbitration Act 1950 and Rule 32 of the Lands Tribunal Rules 1996 (as that rule stood before amendment by Statutory Instrument 1965 of 1977). The power of the Member to award interest under those provisions was a power to award "simple interest at such rate as he thinks fit". That is the power which this court held should have been exercised in the present case.
12. But it is important to keep in mind why this court held that the power to award interest should have been exercised and why it was thought appropriate that this court should exercise that power, notwithstanding that, because the attention of the Member was not directed to the relevant power under Rule 32 as it formerly stood, he did not himself exercise that power. At paragraph 64 of my judgment of 21st December 2000 I said this:

"Where compensation has been determined on the basis that the amount payable in respect of income receivable in, say, 1997, is reduced on the basis that the recipient is to be treated as if he had enjoyed the advantage of receiving payment in 1990 in lieu of that income, it defies common sense to take no account of the fact that, in the events which have happened, he will not receive that payment until the end of 1998. Where the reason why the claimant does not receive that payment until the end of 1998 is that, without any fault on his part, determination of the claim to compensation first advanced in 1989, when the discontinuance order was made, was not resolved until December 1998, the refusal or inability to take account of that fact does not only defy common sense, it leads to a result which, in my view, can be described as manifestly unjust."

13. In the present case, the Member, in applying a discounted cash flow method to the assessment of compensation, adopted a discount rate of 20 per cent. That rate reflected, in part at least, an element to take account of what the Member described in his determination as "the substantial risks attached to the income from what was a hypothetical business without any established track record and facing an uncertain future due to stricter regulation." But, as I pointed out in paragraph 62 of my earlier judgment, it may be assumed that that discount rate of 20 per cent included, not only the element to reflect risk, but also an element to reflect the real rate of return to be obtained on money laid out in the purchase of a future risk free investment. The discount rate, applied in connection with a discounted cash flow method of valuation, reflects in part the advantage to the claimant of receiving moneys sooner rather than later. But that advantage is lost where, as in the present case, 11 years or more have elapsed from the date to which future cash flow has been discounted. The award of interest in the present case is to compensate the claimant for not having been paid compensation at the date (24th June 1989) by reference to which the compensation was assessed by applying a discounted cash flow method. The award of interest is intended to restore to the claimant the advantage that was taken into account by the discounted cash flow method of calculating compensation; but which, in the event, the claimant never enjoyed. In principle, as it seems to me, in a case where the discounted cash flow method has been used, interest should be awarded at a rate which is equal to the aggregate of the real rate of return that was taken into account when fixing the applicable discount rate and an element to allow for inflation.
14. If valuers are to use the discounted cash flow method for assessing compensation payable in respect of a lost future income stream in cases where the relevant order is made on or after 25 September 1991, they must take into account the fact that, if the compensation is actually paid at a date which may be years after the date at which it is assessed, the ability to compensate for that delay will now be circumscribed by the statutory rate prescribed under section 32 of the Land Compensation Act 1961. They must take that into account because they must be aware that, if they are discounting back to an historic date in order to reflect the advantage of receiving compensation in advance of the notional income stream, they will have to allow for the fact that, where the compensation is not paid as at the date at which it has been assessed, some, at least, of that advantage will have been lost. So, in principle, the amount of the discount rate which reflects the real rate of return ought to be equivalent to the amount of the interest rate which reflects the fact that the claimant has, in the event, been kept out of his money. Where the amount of the interest rate is prescribed by statute, the valuer should take that limitation into account in fixing the amount of the discount rate.
15. In the present case, of course, the valuer did not take those matters into account, for the obvious reason that he took the view that interest on compensation was not payable at all. He was right to take the view that no interest was payable under section 32 of the 1961 Act, because that section had not been brought into force at a time relevant to this case; but he was wrong to take the view that there was no interest payable at all. So far as can be ascertained from the determination, he fixed the discount rate by reference to commercial rates of interest and not to artificially low rates of interest. In those circumstances, it seems to me that, in making an award of interest in this case, the court ought to adopt commercial rates and not an artificially low statutory rate. Different considerations would apply in a case where the effective date of the order was after 25th September 1991. But in those cases the different considerations would lead, as it seems to me, to a different approach to the relevant discount rate. A lower rate of prescribed interest should result in a lower discount rate; and so a higher figure for compensation.
16. For those reasons, in the present case it seems to me that this court should not apply by analogy the statutory rate which was fixed under the 1995 regulations. It should not do so because the analogy is not a true analogy on the facts of this case. Equally, as it seems to me, this court should not award interest from 7th August 1989 (that being the effective date under the statute); but should award interest from 24th June 1989, that being the date as at which the compensation was assessed on the discounted cash flow basis. The 24th June 1989 was a convenient date to take for that purpose because it was the anniversary date of the relevant lease.
17. I turn, therefore, to the submissions made by Mr. Aslam in relation to interest. He is content with a date of 24th June 1989 as the starting date. He rejects the land acquisition rate of interest, on the grounds that it would not adequately compensate him for the loss that he has suffered. For the reasons that I have sought to indicate, I agree with him. But I am not able to go as far as Mr. Aslam would wish, which is to apply an interest rate of 25 per cent to compensate him for the losses suffered at the hands of the South Bedfordshire District Council. An interest rate of 25 per cent would be substantially in excess of the actual discount rate taken. The appropriate rate of interest is that part of the discount rate which reflects the real rate of return which the Member may have been taken to have in mind.
18. Mr. Aslam seeks, also, consequential losses in a number of respects. He points out that the effect of being kept out of his money was, first, that he was unable to pay off his bank lending; secondly, that his business collapsed; and, thirdly, that he was obliged to sell his house in order to meet his building society and other commitments. I have considerable sympathy with Mr. Aslam in circumstances where the refusal or failure of the District Council to make any interim payment on account of what has turned out to be a substantial figure for compensation has led to Mr. Aslam losing his house and being out of the housing market, at a time when that market has increased substantially. But those are not losses which, to my mind, can justify a rate of interest higher than the commercial rate.
19. I would propose that we direct that interest be computed at the commercial court rate of interest from 24th June 1989 until the date of payment.
20. LADY JUSTICE HALE: I agree.
Order: Orders as per judgment; costs of today to be added to award of costs on the last occasion; order not to be drawn up for 7 days. (Order not part of the judgment of the court)