COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE LANDS TRIBUNAL
(P.R. Francis FRICS)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE MANCE
LORD JUSTICE CARNWATH
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Joseph Harper QC (instructed by Transport for London) for the Respondent
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Lord Justice Carnwath:
i) The subject property comprised a development of 37 flats and 5 bungalows located off Teevan Close in Addiscombe, Croydon. It was constructed by the claimant, a property developer, in 1989 pursuant to a detailed planning permission dated 29 November 1988 as 36 elderly persons' flats together with warden's accommodation (Evelyn Court), 5 elderly persons' bungalows (Evelyn Mews), communal gardens, access road and 12 parking spaces. The property was of traditional construction having brick faced walls to the ground floor with part tile hung and part rendered elevations to the first, under concrete tile covered pitched roofs.
ii) In November 1989 the units were offered in the open market for sale as sheltered accommodation, but due to the then state of the property market no sales were concluded, and, from September 1990, the claimant decided to let them for general housing purposes on short-term tenancies, despite a further planning application for general housing purposes having been refused on appeal. The lettings were tolerated by the local planning authority as, with the Croydon Tramlink scheme coming into the public domain in May 1991, it became evident that the whole of the subject property would need to be compulsorily acquired, and the purposes for which it had been constructed would not therefore be achievable. There was also an informal arrangement with the local council whereby housing benefit tenants were accommodated in the units.
iii) Had it not been for the scheme, the development would have been sold by 25 March 1993, subject to steps having first been taken by the claimant to obtain vacant possession of the flats and bungalows. Holding costs, if any, would therefore be calculated from that date.
iv) The acquiring authority deposited the Croydon Tramlink Bill in November 1991 with an application for leave to introduce it during the 1991-1992 Parliamentary Session. The claimant petitioned both Houses of Parliament in opposition, but withdrew its petition in April 1994 and received a Parliamentary Undertaking from the acquiring authority. In July of that year the Croydon Tramlink Act received the Royal Assent.
v) Notices to Treat and Notices of Entry were served on the claimant on 1 May 1997, and possession of the subject property was taken on 8 August 1997, this being the valuation date for compensation purposes. The property was demolished late in 1997.
vi) The valuations of the subject property were to be based upon its permitted use for sheltered housing, and the 'ultimate' value of all the units (including the value of the freehold reversion but before sales and other costs) was agreed at £2,585,000. The costs of sale were also agreed at £65,175. Both valuers agreed that the appropriate basis of valuation, in respect of the open market value of the subject property at both 1997 and, in connection with holding costs, 1993 was the residual method.
"(2) The value of land shall… be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realize:
(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:"
"The purpose…is to provide fair compensation for a claimant whose land has been compulsorily taken from him. This is sometimes described as the principle of equivalence. No allowance is to be made because the acquisition was compulsory; and land is to be valued at the price it might be expected to realise if sold by a willing seller, not an unwilling seller. But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss. Conversely, and built into the concept of fair compensation, is the corollary that a claimant is not entitled to receive more than fair compensation: a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount. It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail.
Land may, of course, have a special value to a claimant over and above the price it would fetch if sold in the open market. Fair compensation requires that he should be paid for the value of the land to him, not its value generally or its value to the acquiring authority. As already noted, this is well-established. If he is using the land to carry on a business, the value of the land to him will include the value of his being able to conduct his business there without disturbance. Compensation should cover this disturbance loss as well as the market value of the land itself. The authority which takes land on…compulsory acquisition does not acquire the business, but the...acquisition prevents the claimant from continuing his business on the land. So the claimant loses the land and, with it, the special value it had for him as the site of his business……In practice it is customary and convenient to assess the value of the land and the disturbance loss separately, but strictly in law these are no more than two inseparable elements of a single whole in that together they make up the value of the land to the owner…"
The issue between the parties
"… the claimant would, after obtaining vacant possession, refurbish and sell each of the flats and bungalows (apart from the warden's accommodation) individually over an 8 month period, and would then dispose of the freehold reversion to an investor."
Accordingly, his valuation started from the expected total sales revenue of the individual flats (£2,370,000), which was adjusted downwards (in summary, to reflect costs of cleaning and marketing, sales costs, and the fact that sales price would be achieved over 8 months), to give a final figure (after adding the "freehold investment value") of £2,400,000.
"The purchaser, who would most likely be an entrepreneur would, in effect, buy the property 'wholesale' with a view to 'retailing' the units individually. This was known in the trade as 'break-up'. In formulating his bid, the prospective purchaser would take into account what was required to be spent to bring all but one of the units into a suitable condition to be sold as sheltered accommodation, with the final unit to be retained for warden's accommodation. He would also build in a requirement for profit to cover his costs, risks and effort in undertaking the project." (para 17)
Her valuation was constructed in a rather different way to that of Mr Plant. She started from the "ultimate value" for the freehold of £2,585,000, from which she deducted figures for "profit", pre-sale works, finance costs over 9 months, and site purchase costs, to give a final "site value" of £1,960,000.
"As for any risk enterprise, a person undertaking development will seek to make a profit on the operation. Target levels of profit will depend on the nature of the development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development." (Johnson, Davies and Shapiro, Modern Methods of Valuation (9th Ed))
The Tribunal recorded:
"Miss Ellis said that in view of the inherently limited risks of the project, a purchaser would be satisfied with 7.5% profit. For instance, outlay on building costs was relatively small and the development/sales period quite short as compared with most development projects." (para 20)
"The claimant was in the business of developing sheltered housing and, if it were not for the scheme, would have marketed and sold the units to individual purchasers at a profit. To assess compensation on the basis that, as the acquiring authority had done, the claimant would be deprived of profit that it would otherwise have achieved, was tantamount to paying less for the land, due to the scheme, than it was really worth." (para 9)
The Tribunal recorded Miss Ellis' comment on this in cross-examination (a passage strongly relied on by Mr Katkowski QC, for the claimant):
"She said that whilst she thought the RICS definition of open market value obliged her to adopt the single-sale method, she accepted that in the no-scheme world the claimant would have sold the units individually and retained the profits from the development. Thus, a higher figure would have been achieved than that which she was assessing as compensation under the 1961 Act." (para 24)
In submissions, Mr Harper for LRT submitted that "the key difference between the parties came down to who was going to take the profit".
The Tribunal's decision
In my opinion, the reference in s5(2) to the land being 'sold in the open market', together with the parties' agreement that the valuation date was 27 February 1996, means that the sale of the land is assumed to have taken place at that date, not over a period of 12 months or more commencing with that date… the expression 'market value' has no realistic meaning in the absence of an assumed sale on the market."
He had accepted the authority's evidence that:
"… the most likely purchaser of the land on that basis would have been a developer who intended to carry out works to make it saleable to purchasers requiring individual self-build plots".
"Under rule (6) a claimant is entitled to be compensated for any loss of profits, in business carried out on the land acquired, that is attributable to the compulsory acquisition. That is not just loss of profits in the shadow period prior to the acquisition, but also profits that it would have achieved in the post acquisition period. It does not seem to me that the fact that the business of the claimant is a property developer, where the profits are derived from the land itself, is any reason in principal for denying him compensation for loss of profits. If the claimant ran a business from the site, such as a shop, and from that shop he made a profit, he would be entitled, as an item of disturbance under rule (6), to compensation for any losses of profit occasioned by the compulsory acquisition. The question is one of causation. If, in the absence of the compulsory acquisition, he would have made a profit that is not reflected in the value of the land assessed under rule (2), he is in principle entitled to be compensated for that loss under rule (6)." (para 38)
"It is necessary to consider the nature of the claimant's business. Were it not for the scheme, (and this point was not in issue) it would have sold the flats and bungalows over a period of around 9 months, and could, had it so wished, have then sold the freehold reversion. The 'ultimate', or gross, figure it would have achieved was £2,585,000. That money, less the sales, marketing and other costs to which I will turn, would be available to be ploughed into the next site. That next development would in turn show a profit, and so the cycle would continue. If, as was the acquiring authority's case, the profit from the development at the subject property was denied to the claimant then that figure would not be available to go towards the next deal, and the claimant would therefore be disadvantaged." (para 35)
"101. What the claimant receives by way of compensation (the value of the land) is a sum that it can invest elsewhere in order to make a profit. It is put in the same position as it would have been in, at the valuation date, if the land had not been compulsorily acquired. If the claimant is kept out of its money for any period after the date it loses possession, it will receive interest – to reflect what that money would have been worth to it if it had been paid on the date of entry. Since the claimant obtains compensation for the land that reflects its potentiality for profit making, and interest that reflects the cost of borrowing money to invest in another profit-making venture, it is fully compensated."
"Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale. The question is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date (see IRC –v- Crossman  AC 26). Furthermore, the hypothesis must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market (see Duke of Buccleuch v IRC  1 AC 506 at 525). To this extent, but only to this extent, the express terms of the statute may introduce an element of artificiality into the hypothesis.
In all other respects, the theme which runs through the authorities is that one assumes that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper enquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable."
"When, as is usually the case, the estate consists of an aggregate of items of property, each item must be separately valued, and it is not difficult to see that problems may arise as to the manner in which the separate units of valuation are to be ascertained or in which individual items are to be grouped into units of valuation. These problems must necessarily be resolved, as they are in practice, in a common sense way. The estate is to be taken as it is found: it is not to be supposed, in order to obtain higher figures of valuation, that any substantial expense is to be incurred or work done in organising the estate into units: on the other hand, some practical grouping or classification, such as can reasonably be carried out without undue expenditure of time or effort, by a prudent man concerned to obtain the most favourable price, may be supposed."
Hoffmann LJ summarised the position:-
"This shows that whether one is taking apart or putting together, the principle is that the vendor must be supposed to have 'taken the course which would get the largest price for the combined holding', subject to the caveat in Buccleuch that it does not entail 'undue expenditure of time and effort'." (p 373 f-g).
The principles applicable to rule (2) in the Land Compensation Act are in principle no different.
"… the rate of return the potential purchaser would expect on his money, assuming that the payment to him at the future date is free of risk." (p 132D)
The "risk factor" takes account of the fact that:
"the greater the risk that the purchaser may not receive in due course the future payments he is buying, the higher the rate of return he will require" (p 132E).
As Miss Ellis explained, her percentage deduction for "profit" (adopted by the Tribunal) related to the risk factor. It represented the hypothetical purchaser's required return for the risk involved in carrying out the project. The low degree of risk in this case was represented by a low percentage deduction. The time factor was separately allowed for by a deduction of 8.5% in respect of "finance".
"… the owner in a proper case – that is, in a case where he really does incur a loss of money by disturbance due to the taking over and beyond the loss for which he is to be reimbursed in respect of the land taken – is entitled, because it has to do with the land, to have that element of the loss taken into the reckoning of the fair price of the land, as has been held by the Courts from a very early stage." (p 45).
He was using the word disturbance "for brevity" (p 43). He recognised that the personal loss under the second part of rule (6) was not confined to the effects of "disturbance" in the narrow sense of the displacement of an occupier. The potential width of rule (6) is illustrated by more recent cases (see Wrexham Maelor BC –v- MacDougall  2 EGLR 23, Dublin City –v- Underwood  1 IR 117, and the discussion of these cases in Law Commission: Compensation Final Report, Law Com 286, para 4.4 ff).
"Loss of profits on development of a building site is not a subject of compensation. The profitability of the land has already been reflected in the market value of the land."
That passage was supported by reference to two English Divisional Court cases, Collins –v- Feltham UDC  4 AllER 189, and Wimpey & Co –v- Middlesex CC  3 AllER 781. Unfortunately the reported decisions in those two cases take the form simply of answers to questions raised by the stated cases, without any more detailed reasoning. However, they show that the law as I have attempted to explain it is consistent with the what has been understood for very many years.
"… since the rents on which the capital value was calculated constitute the whole of the profit derived from the ownership of this property." (see p 8 K-L).
In upholding the decision, the Court of Appeal treated the case as analogous to that of a business carried on on the subject land. Henry LJ said:-
"Rule (2) deals with the basic market value calculation but that rule (2) calculation will differ depending on whether it is anticipated that the business will be moved to a new site or whether it cannot be re-located: …. In the former case it is assumed that with the compensation paid he has acquired an equivalent property suitable for the business, and under rule (6) ….the claimant will recover the disturbance costs of the move, which may well include a temporary loss of profit, if caused by the move. But where the business cannot be re-located, the rule (2) calculation will be for the value of the business as a going concern, i.e. the value of the land and the profits that go with it." (p 9F).
He treated the case before him as one where the claimant had been compensated "on the extinguishment basis"– the loss to him of his business as a going concern" (p 10E). In approaching it in that way he relied on the principles stated in the Shun Fung case as to compensation for business disturbance.
Lord Justice Mance