Part IV        
The compensation code-
core principles (1)

Introduction

                    4.1             In this Part we consider the following issues:

                                            (1)             Statement of right to compensation

                                            (2)             Preliminary issues

                                            (3)             Market value

                                            (4)             Disturbance

(1) Statement of right to compensation

                    4.2             The starting point for the Code should be a simple statement that those interested in the subject land are entitled to compensation under the Act.

                    4.3             For example, section 52 of the Land Acquisition Act 1989 (Cth) (“LAA (Cth)”) of Australia provides:

Entitlement to compensation

A person from whom an interest in land is acquired by compulsory process is entitled to be paid compensation by the Commonwealth in accordance with this Part in respect of the acquisition.

                    4.4             However, the Code also needs to take account of cases where the compensation is for adverse effects on an existing interest, rather than acquisition as such,[1] for example:

                                            (1)             Acquisition of new rights;

                                            (2)             Interference with existing easements and other rights;

                                            (3)             Injurious affection where no land is taken.

These issues will be considered in later Parts.

Proposal 1: Right to compensation

Subject to the provisions of the Code, any person from whom an interest, in existence at the date of notice to treat, is acquired by compulsory purchase, or whose interest in the subject land is diminished or adversely affected by or pursuant to compulsory purchase, is entitled to compensation assessed in accordance with the following rules.

(2) Preliminary issues

                    4.5             Three issues arise: first, whether there should be an express statement of the general objective of the Compensation Code; secondly, whether the traditional language describing the standard heads of compensation should be preserved; thirdly, whether compensation should continue to be treated as a “single global figure”.

(i) General objective

                    4.6             There is at present no statutory statement in the Act of the general principle of “fair compensation”, which is said to underlie the compensation rules.[2] Such a statement of principle could be used in interpreting and applying the more detailed rules. Alternatively, the Tribunal could be given a discretion to depart from the detailed rules in exceptional cases, in order to achieve “fair compensation”.

                    4.7             The latter approach is adopted by the Australian Commonwealth Act. The LAA (Cth), s 55(1) provides:

                                            (1)             The amount of compensation to which a person is entitled under this Part in respect of the acquisition of an interest in land is such amount as, having regard to all relevant matters, will justly compensate the person for the acquisition.

                                            (2)             In assessing the amount of compensation to which the person is entitled, regard shall be had to all relevant matters, including: (emphasis added)

The individual heads of compensation (market value etc) are then set out. There is therefore a measure of discretion to depart from the standard heads to achieve “just compensation”.[3]

                    4.8             This provision followed the ALRC recommendation that, in addition to the standard list of the heads of compensation, there should be a “just compensation override”:

The list will specify the ingredients which, in the overwhelming majority of cases, will provide just compensation to the claimant. However, cases may arise where that list will provide a measure of compensation which in the opinion of the court is inadequate properly to compensate the loss. It is important, in terms of both constitutional validity and justice to the claimant, to provide a means whereby the court may increase the award of compensation to a figure which, in its opinion, will fully compensate the loss. With this in mind, it would be desirable to start the statutory list by a formula providing that the amount of compensation payable to a person who had an interest that has been divested, extinguished or diminished by the acquisition is such amount as will justly compensate the person in respect of the acquisition.[4]

                    4.9             The reference to “constitutional validity” in this passage is a reference to the constitutional requirement in Australia that laws for the acquisition of property should provide for “just terms”.[5]

                4.10             There is no direct analogy in this country with the constitutional requirement for “just terms”,[6] so that the comparison must be approached with caution. However, the recent affirmation by the Privy Council of the principle of “fair compensation” underlying the statutory scheme[7] provides a firm basis for stating such a principle expressly in the new Code.

                4.11             On balance, we do not think it right to follow the ALRC by expressly allowing a discretion to depart from the rules to achieve fair compensation (a “fair compensation override”). We think that would introduce an undesirable element of uncertainty, and would conflict with the objective of “unambiguously defined principles”.[8] On the other hand, a statement of the principle of fair compensation by way of introduction to the detailed rules should help to ensure that they are construed liberally with that objective in mind.

(ii) Traditional terms

                4.12             The Policy Statement makes no proposal to change the traditional headings under which compensation is assessed. It notes criticisms that some of the terms are archaic, but suggests that:

Any attempt to use different words would inevitably be tested in the courts to measure how far the new wording was intended to change their applicability.[9]

We agree. The general intention is substantially to reproduce, in codified form, the established principles. Therefore, there seems no good reason to change the traditional terms, unless one is able to offer other, more modern terms, which better express the underlying concepts. None of the comparisons we have considered offers any clearly preferable alternatives.[10]

(iii) Single global figure

                4.13             As we have noted,[11] in spite of the separate heads under which compensation is traditionally assessed, it is said to represent “in essence one sum”. Historically, the rule was important in relation to tax law, which treated the compensation payment as a whole, as the price for sale of the land. However, this position has been modified by statute, which allows apportionment between capital and income elements.[12]  It may also be significant in other respects. For example, the statute provides for interest to run on the whole compensation sum from the date of entry, and makes no distinction between the different elements.[13]

                4.14             We think it is convenient to retain the established principle in the new Code.[14] As a matter of  drafting, this can be achieved by expressing the right to compensation as a right to “an amount”, to be achieved having regard to the detailed rules.[15] We invite comments on any other practical implications of the rule, which need to be taken into account in the drafting of the Code.

Proposal 2: Heads of compensation

The right to compensation shall be a right to an amount (not less than nil), assessed in accordance with the principle of fair compensation, having regard to the following matters (as defined below): market value of the subject land; disturbance; injury to retained land (severance or injurious affection, less betterment); (where applicable) equivalent reinstatement.

Consultation issues

Do consultees agree that:

                                           (1)             The Code should include a statement of the objective of “fair compensation”?

                                           (2)             This should be expressed as principle of interpretation only (rather than as permitting the Tribunal any general discretion to depart from the detailed rules)?

                                           (3)             The right to compensation should be a right to a single (“global”) amount, assessed having regard to the detailed rules (market value, disturbance etc)?

(3) Market value

Existing law

                4.15             The “market value” rule was established by rule (2) of the 1919 rules, now 1961 Act, section 5(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.

Although the rule refers only to a “willing seller”, [16] it is implicit that both parties are willing:

The compensation must be determined… by reference to the price which a willing vendor might reasonably expect to obtain from a willing purchaser. The disinclination of the vendor to part with his land and the urgent necessity of the purchaser to buy must alike be disregarded.[17]

                4.16             There is some uncertainty as to whether rule (2) applies only to the valuation of the land which is being acquired, or whether it applies generally, wherever land value is relevant to the assessment of compensation. In our view, the latter is the correct interpretation. Section 5 is expressed in general terms as applying to “compensation in respect of any compulsory acquisition”, without referring to any particular head of compensation; and rule (2) refers to “the value of land” (not value of the land,[18] or of “the relevant land”[19]).   As we discuss below, this issue may have some practical implications for the scope of compensation for injurious affection.[20] In any event, it is desirable that the position should be clarified in the new Code, and that any exceptions to the “market value” principle are specifically identified.

                4.17             Some of the Australian definitions are fuller than the 1961 Act. For example, section 56 of the LAA (Cth) provides:

For the purposes of this Division, the market value of an interest in land at a particular time is the amount that would have been paid for the interest if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer.[21]

However, there is no suggestion in the cases that the different language implies a difference of substance.

Policy Statement

                4.18             The retention of open market value is recommended by the Policy Statement, but to be applied more flexibly:

We have therefore come to the conclusion that open market value seems to present the fairest basis for assessing the compensation payable for the land taken. However, as previously mentioned, valuation cannot be an exact science and the application of the principles used to define open market value will always produce a range of figures. We would therefore wish to encourage acquiring authorities to consider whether there would be advantage in adopting a more flexible approach to negotiations on the open market value of any particular site within the limits set by such principles…[22]

                4.19             It is not clear from the Policy Statement how, as a matter of drafting, this “more flexible” approach is to be achieved. It appears to be seen principally as a matter of practice for authorities in negotiations. However, it may be assisted by the statutory expression of the overriding objective of fair compensation (as explained by our formulation in Proposal 2; and by a specific reference to both parties as “willing”, thereby emphasising the need to find a fair balance between the interests of both.

Proposal 3: Market value

(1) “Market value” of any land means the amount (not less than nil) which the land might be expected to realise if sold in the open market by a willing seller to a willing buyer.

(2) Except as otherwise provided, for the purpose of any provisions of the Code which depend on the value of land (including any reduction or increase in the value of land), value means “market value” as so defined.

Consultation issues

Do consultees agree that:

                                           (1)             “Market value” should be defined as the amount for which the land might be sold by a willing buyer to a willing seller?

                                           (2)             The market value test should apply (except as otherwise stated) to any provisions of the Code depending on the value of land?

(4) Disturbance

Existing law

Sources of the law

                4.20             The right to compensation for disturbance is not in terms conferred by statute. It was derived from cases under the 1845 Act, which treated such personal loss as part of the “the value to the owner” or “the fair price of the land”.[23] It was preserved, following the introduction of the “market value” test under rule (2), by what is now section 5(6) of the 1961 Act:

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.

For the purposes of the present Report, it is unnecessary to do more than summarise some of the main points derived from the case law.[24]

                4.21             The principles considered below are applicable to those who have compensatable interests in the subject land. The 1973 Act introduced provision for similar payments to occupants without compensatable interests, covering the reasonable expenses of removal, and business losses.[25]

General principle

The traditional test

                4.22             An often cited statement of the rule is that in Harvey v Crawley DC:

Any loss sustained by a dispossessed owner 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, second, that it is the natural and reasonable consequence of the dispossession of the owner.[26]

                4.23             The application of this rule to business losses was explained by the Privy Council in the leading case of Director of Buildings and Land v Shun Fung Ironworks:[27]

Compensation should cover this disturbance loss as well as the market value of the land itself. The authority which takes the land on resumption or compulsory acquisition does not acquire the business, but the resumption or 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. The expenses and any losses he incurs in moving his business to a new site will ordinarily be the measure of the special loss he sustains by being deprived of the land and disturbed in his enjoyment of it. If, exceptionally, the business cannot be moved elsewhere, so it simply has to close down, prima facie his loss will be measured by the value of the business as a going concern.[28]

                4.24             It is to be noted that this head of compensation is not confined to “disturbance” in the narrow sense (that is, the financial effects of displacement), but covers any other losses properly attributable to the acquisition, “not directly based on the value of land”.[29] In practice, the word “disturbance” has been used in a broad sense, to include such general financial consequences. This usage seems to follow the leading judgment of Scott LJ in Horn v Sunderland Corporation, where he used the term disturbance “for brevity” to describe those elements of “value to the owner”, in addition to market value, which were preserved by rule (6) of the 1919 rules.[30]

Typical heads of claim

                4.25             Disturbance losses may take many forms. Typical examples are:

                                            (1)             Moving house (removal costs, adaptation of furnishings, etc);

                                            (2)             Relocating a business (cost of search for new premises, removal costs, adaptation of new premises, temporary loss of profits, partial loss of goodwill etc.);

                                            (3)             Where the business cannot be relocated, value of the business on a “total extinguishment” basis (including value of goodwill, closure costs etc.);

                                            (4)             Legal and professional fees;[31]

                                            (5)             Additional tax liabilities.[32]

Relocation or extinguishment

                4.26             This issue requires fuller discussion, since it was identified by the Policy Statement as one for consideration by the Law Commission.[33] Generally, where the subject land is occupied for business purposes, the owners of the business will be willing and able to relocate it, and this will be the cheaper option for the authority. In some cases, however, there may be an issue whether compensation is to be assessed on a “relocation” or “total extinguishment” basis.

                4.27             This was the main issue in the Shun Fung case.[34] The relevant questions were explained by Lord  Nicholls:

Three principal questions arise on relocation claims. (1) Can the business be relocated, or has it effectually been extinguished? Most businesses are capable of being relocated, but exceptionally this may not be practicable: for example, another suitable site may not exist. If the business is not capable of being relocated, then perforce compensation will have to be assessed on the extinguishment basis. (2) Does the claimant intend to relocate? The claimant must have reached a firm decision to relocate his business, and he must be reasonably assured that he will be able to do so. (3) Would a reasonable businessman relocate the business?[35]

                4.28             In Shun Fung the relocation claim failed, under both the first and the third tests. The latter requires some comment. On this aspect, the facts of the case were unusual, in that the assessed compensation on a relocation basis was almost four times that on a total extinguishment basis.[36] In normal circumstances, the disparity is unlikely to be so great. However, (in a passage headed “no rigid limitations”) Lord Nicholls made clear that the mere fact that “relocation” compensation would exceed that for “total extinguishment” would not of itself rule out the claim:

A businessman may spend large sums of money in setting up a new business. Before the business has time to prove itself, his premises are acquired compulsorily. Having no profit record, the business may be worth little. The compensation payable on an extinguishment basis would be paltry. But a reasonable businessman, spending his own money might consider it worthwhile incurring expenditure in fitting out new premises nearby and continuing his business there. Fairness requires that in such a case the claimant should be entitled, in respect of the disturbance of his business, to his reasonable costs incurred in the removal of his business and in setting it up again at the new property.[37]

The “reasonable businessman” test

                4.29             The answer was held to depend on how “a reasonable businessman using his own money” would behave in the circumstances. The disparity between the two figures would be relevant, in that the greater the disparity, the greater the need to examine the basis of the claim:

In such a case, the tribunal or court will need to scrutinise the relocation claim with care, to see whether a reasonable businessman having adequate funds of his own might incur the expenditure…Compensation is not intended to provide a means whereby a dispossessed owner can finance a business venture which, were he using his own money, he would not countenance. However, when considering these matters the tribunal or court might allow itself a moderate degree of latitude in approving as reasonable the relocation of a family business…[38]

                4.30             On the facts of the case, in the Tribunal’s view, the project was not economically feasible by ordinary commercial standards, because the estimated return on the required capital investment fell short of what a reasonable businessman would require for such a project.[39] For this reason, the Privy Council agreed with the  Tribunal that the claimant was not entitled to claim on the relocation basis:

He would not be so entitled because a reasonable businessman would  not take this course. The acquiring authority cannot be expected to be responsible for expenses which no reasonable businessman would incur.[40]

                4.31             It may be observed that this test is more precise, and possibly more restrictive, than that applied by the Court of Appeal in comparable cases. The test has been expressed as one of overall reasonableness, rather than by reference to a specific commercial test. Thus, in one case, it was said that the issue should be decided:

… according as it was reasonable or unreasonable for the appellants in the circumstances, having been deprived of their existing business premises, to substitute other business premises and transfer their business to the substituted premises.[41] (emphasis added)

                4.32             More recently, in upholding the Lands Tribunal’s refusal to award compensation on a reinstatement basis[42] for the acquisition of the Festiniog railway, [43] Ormerod LJ commented:

…if an undertaking in question is a business undertaking, then the question of the relation between the cost of reinstatement and the value of the undertaking is relevant and may be paramount in considering the question of reasonableness…

Having decided on the evidence that the undertaking was a business one, [the Tribunal] realised that the cost of the proposed reinstatement was out of all proportion to the value of the undertaking, and in those circumstances felt bound to come to the conclusion that reinstatement was not a reasonable basis of compensation.[44] (emphasis added)

                4.33             Arguably, such an approach allows the Tribunal greater flexibility to take into account the reasonable interest of a dispossessed owner in carrying on an established business (which may have been his main occupation and livelihood), even where it might not be justified by ordinary commercial considerations, as applied to a new project. Lord Nicholls himself accepted that the “reasonable businessman” test needs to be applied flexibly, and that the degree of the disparity of cost was an important factor. He was prepared to allow “a moderate degree of latitude” in relation to a family business.[45] Accordingly, in our provisional proposal below, we prefer a test of “reasonableness”, rather than one tied to the “reasonable businessman”.

Other disturbance issues

Failure to mitigate

                4.34             As in the case of common law damages, the compensation may be reduced if the claimant has failed to mitigate his loss:

The law expects those who claim recompense to behave reasonably. If a reasonable person in the position of the claimant would have taken steps to eliminate or reduce the loss, and the claimant failed to do so, he cannot fairly expect to be compensated for the loss or the unreasonable part of it. Likewise if a reasonable person in the position of the claimant would not have incurred, or would not incur, the expenditure being claimed, fairness does not require that the authority should be responsible for such expenditure. Expressed in other words, losses or expenditure incurred unreasonably cannot sensibly be said to be caused by, or be the consequence of, or be due to the resumption.[46]

                4.35             The onus lies on the authority to establish a failure by the claimant to mitigate.[47]

Personal circumstances

                4.36             In a case in 1965, the Court of Appeal held that where a claimant was unable to re-establish his business, and thereby mitigate his loss, because of ill health, he could not claim compensation for the total extinguishment of goodwill.[48] The state of his health was not caused by the acquisition, and was regarded as an extraneous consideration.

                4.37             This rule was strongly criticised. For example, a Justice report commented:

We believe that it is right in such circumstances to draw an analogy with the liability which arises with regard to personal injury in the law of tort, whereby the wrongdoer is required to take his victim as he finds him, and to suffer the greater liability if that victim should possess an egg-shell skull…[T]he  personal circumstances of the claimant, such as age and state of health, [should] be taken fully into account.[49]

                4.38             The rule was mitigated by statute in 1973, by giving traders over 60, in certain circumstances, a statutory right to claim compensation on the basis of total extinguishment, even where relocation might be possible.[50] In other cases, the rule remains.

Pre-acquisition losses

                4.39             The Shun Fung case established that losses incurred from the time of the announcement of the proposed acquisition, even though preceding the date of acquisition or entry, could be included in the claim:

… losses incurred in anticipation of the resumption and because of the threat which resumption presented are to be regarded as losses caused by the resumption as much as losses arising after resumption.[51]

                4.40             It seems that this basis of claim is confined to the threat of acquisition as such (as in the Shun Fung), rather than loss due to blight caused by the authority’s proposals in general. For example, the declining profits of a corner shop in an area blighted by redevelopment proposals may be attributable to the “scheme”, but not necessarily to the acquisition, or threat of acquisition, of the individual shop itself. Before Shun Fung, the Scottish Court of Session took a relatively narrow view, when disallowing a claim by a shop-owner for losses due to comprehensive development of a surrounding area:

It is dispossession caused by the taking of lands which gives rise to compensation, not the threat of dispossession or the effects of publication of plans for the execution of the works.[52]

Since Shun Fung, it is clear that loss due to “the threat of dispossession” may be claimed,[53] but it is uncertain how far the consequences of the wider scheme may be taken into account.

Presumption of value for money

                4.41             Disturbance compensation is not normally payable for the cost of new premises, even if they are more expensive. There is a presumption of “value for money”, that is, that any extra costs will be reflected in improvements which represent value for money in the hands of the claimant.[54] However, that presumption is rebuttable. Thus, in J A Bibby & Sons Ltd v Merseyside County Council,[55]it was held that increased operating costs were a possible head of claim, but such a claim would only succeed where it was shown that there was no reasonable alternative to accepting the increased costs, and that the claimants were in no better position than they were previously.[56]

                4.42             The cost of structural adaptations or additions may be disallowed on the same basis;[57]or a deduction may be made to reflect the improvement.[58]

Consistency

                4.43             The disturbance claim must be consistent with the basis of the claim for value of the land. So, if the site is valued as having potential for development which would involve displacing the business in any event, no separate claim can be made for disturbance[59] (The same principle applies to other heads of compensation, such as severance.[60] Accordingly, it will be expressed as a separate rule in the Code[61]).

“Disturbance”  in other jurisdictions

                4.44             Disturbance is an accepted part of compensation in most other common law jurisdictions, although not always under that name. Sometimes the right is expressed in the statute; sometimes it is simply treated in the cases as part of the “value to the owner”.[62] Statutory formulations vary from a simple statement of principle to a more detailed list.[63]

                4.45             An example of a simple statement of principle is in the LAA (Cth).  The word “disturbance” is not used in the Act, although it was used in the ALRC Draft Bill. Section  55(2)(c) allows a claim for:

any loss, injury or damage suffered, or expense reasonably incurred, by the person that was, having regard to all relevant considerations, including any circumstances peculiar to the person, suffered or incurred by the person as a direct, natural and reasonable consequence of:

(i) the acquisition of the interest; or

(ii) the making or giving of the pre-acquisition declaration… (emphasis added)

                4.46             This wording follows the recommendation of the ALRC. The italicised words were designed to ensure that personal circumstances could be taken into account, following criticism of the Bailey case.[64] The ALRC agreed with that criticism:

Age or ill health might have forced the owner to retire in any case. However, but for the acquisition, he would have been able to sell the business as a going concern. Also the acquisition may hasten retirement. Continuing to carry on an established business is very different from re-establishing in a new location, particularly for the elderly and infirm. In determining compensation for disturbance, the court should have regard to circumstances peculiar to the claimant.[65]

                4.47             Express provision is made for legal costs: LAA(Cth), s 55(2)(e):

(e) any legal or other professional costs reasonably incurred by the person in relation to the acquisition, including the costs of:

(i) obtaining advice in relation to the acquisition, the entitlement of the person to compensation or the amount of compensation; and

(ii) executing, producing or surrendering such documents, and making out and providing such abstracts and attested copies, as the Secretary to the Attorney-General's Department… requires.

                4.48             There is also a statutory statement of the “consistency” principle[66] under section 57:

Where the market value of an interest in land acquired by compulsory process is assessed upon the basis that the land had potential to be used for a purpose other than the purpose for which it was used at the time of acquisition, compensation shall not be allowed in respect of any loss or damage that would necessarily have been suffered, or expense that would necessarily have been incurred, in realising that potential.

Policy Statement

                4.49             The Policy Statement gives strong support for a statutory statement of the right to compensation for disturbance. It proposes new legislation:

                                            (1)             to define general principles for assessing disturbance so as to include all actual costs and losses which are incurred reasonably and justifiably, are not too remote and represent a natural and reasonable consequence of the dispossession (Law Commission);

                                            (2)             to codify the principles established in case law with regard to relocation v extinguishment (Law Commission), and to confirm the current age-related  provisions;

                                            (3)             to provide that all appropriate professional fees (surveyors, lawyers and accountants) should be paid on a reasonable costs basis.[67]

                4.50             In relation to the first, it favours a general “broad but unequivocal” expression of the principle, thereby retaining “the flexible and common sense approach which has long been established by case law…,” rather than a statement of specific heads of compensation:[68]

It seems obvious… that any attempt to specify in statute the specific matters for which disturbance compensation might be considered could never be comprehensive and so would be of no benefit. Indeed, it could be counter-productive if it were to inhibit acquiring authorities from adopting a pragmatic approach.[69]

                4.51             On the second issue, the principal problem is identified as that of determining what should be regarded as “reasonably practicable”. The Law Commission is asked to consider this issue taking account of, in particular, the criteria established in the Shun Fung case. It is accepted that it may not always be appropriate to base compensation on “the least cost to the acquiring authority”. Subject to the Commission’s views, it is suggested that there may be case for:

…relying on the flexibility provided by a statement of qualitative principles accompanied by the scope for the determination of any particularly difficult case on its own merits, if necessary by the Lands Tribunal.[70]

                4.52             As already explained, the Report proposes a fixed starting point for disturbance compensation, the date of the first notice of the order.[71]

                4.53             There are other points of detail in the Policy Statement:

                                            (1)             Business loss should not be ruled out merely because the business has ceased operating before the date of possession;[72]

                                            (2)             Compensation may include elements of both relocation and extinguishment;[73]

                                            (3)             The statement of principles should include provision to offset adverse tax consequences of the acquisition:

… in line with current case law,[74] we consider that the statement of the principles to be applied in assessing compensation should include provision for any additional tax incurred as a direct result of the compulsory acquisition of a claimant’s land, as well as the cost of any loan incurred solely, and justifiably, in order to be able to acquire land in time to benefit from capital gains roll-over relief.[75]

Discussion

                4.54             Generally, the Policy Statement gives a clear lead as to the content and form of the provisions for disturbance. Certain issues require further discussion:

                                            (1)             Wording of the causation test;

                                            (2)             Failure to mitigate;

                                            (3)             Personal circumstances;

                                            (4)             The test of “reasonableness” in relation to relocation versus extinguishment;

                                            (5)             Partial relocation;

                                            (6)             Starting date for disturbance compensation;

                                            (7)             Other points of detail.

(1) Causation

                4.55             The first proposal in the Policy Statement follows the traditional test, which allows compensation for any loss which flows from a compulsory acquisition:

… provided, first, that it is not too remote and, secondly, that it is the natural and reasonable consequence of the dispossession of the owner.”[76]

In the LAA (Cth) the equivalent test refers, more concisely, to the “direct, natural and reasonable consequence of” the acquisition.

                4.56             The use of the word “direct” in this context was in fact contrary to the recommendation of the ALRC, which was concerned that it might result in too narrow an approach.[77] However, it is difficult to see that the use of the word “direct”, instead of “not too remote”, makes a material difference.[78] As Lord Nicholls said, in the Shun Fung case, precision in the language of causation is difficult to achieve:

The familiar and perennial difficulty lies in attempting to formulate clear practical guidance on the criteria by which remoteness is to be judged in the infinitely different sets of circumstances which arise. The overriding principle of fairness is comprehensive, but it suffers from the drawback of being imprecise, even vague, in practical terms. The tools used by lawyers are concepts of chains of causation and intervening events and the like. ‘Reasonably foreseeable’, ‘not unlikely’, ‘probable’, ‘natural’, are among the descriptions which are or have been used in particular contexts. Even the much maligned epithet ‘direct’ may still have its uses as a limiting factor in some situations.[79]

                4.57             Against this background, it seems unnecessary and possibly confusing to over-complicate the definition of causation. We shall use the expression “fairly attributable” as sufficiently encompassing the principles discussed by Lord Nicholls.[80]

(2) Failure to mitigate

                4.58             As noted by Lord Nicholls,[81] the claimant’s duty to mitigate is implicit in the ordinary principles of causation. However, for completeness it may be desirable to include a specific statement in the Code. This will also make clear that the duty to mitigate runs from the first notice date[82] and the burden of proof of the failure to mitigate is on the acquiring authority.[83] Although most relevant to disturbance, it could in principle be relevant in other contexts (for example, equivalent reinstatement, or temporary loss caused to retained land). Accordingly, it will be covered by a separate Proposal in the new Code (see Part V, para 5.70 below).

(3) Personal circumstances

                4.59             The Policy Statement proposes the retention of the special concession in the 1973 Act for traders over 60 years old. While we accept that proposal, we see force in the ALRC’s criticism of the Bailey case. We propose provisionally that the statute should expressly allow for the personal circumstances of the claimant to be taken into account. The retention of the special 1973 rule should be without prejudice to that general position.

(4) Reasonableness and relocation

                4.60             The Policy Statement proposes that the case law principles with regard to relocation should be “codified”, but then suggests that this should take the form of a statement of “qualitative principles”, allowing flexibility in particular cases. As already noted,[84] the most recent authoritative statement in case law is in Shun Fung,where the tests were expressed as three questions:

(1) Can the business be relocated, or has it effectively been  extinguished?

(2) Does the claimant intend to relocate?

(3) Would a reasonable businessman relocate the business?

                4.61             However, as we have explained, the facts of the case were unusual, because of the problems of relocating a steel works in Hong Kong and the wide disparity between the bases of compensation. It does not appear to be an issue which gives rise to frequent problems in this country. In view of the wide variety of situations which may arise, it is important to avoid too prescriptive a test. As the Policy Statement itself points out, in relation to the general test for disturbance, this can be counter-productive if it inhibits a pragmatic approach to individual cases.

                4.62             Accordingly, our provisional view is that a detailed statement of the rules for relocation versus extinguishment is unnecessary.[85] However, it would be helpful to confirm that compensation on the relocation basis may be allowed, even if it exceeds that on extinguishment. For the reasons discussed earlier,[86] we think the “reasonable businessman” test, as applied in Shun Fung, may be unduly restrictive for the generality of cases. We provisionally propose, as the test, whether relocation is “reasonable in all the circumstances”, including any personal to the claimant.

(5) Partial relocation

                4.63             The Policy Statement suggested a need to make clear that compensation may include elements of both relocation and extinguishment. This is already accepted in the case law.[87] However, it ties in with an issue raised by CPPRAG and the Policy Statement in relation to injurious affection.[88] This is the lack of compensation for the replacement of agricultural buildings, made necessary by severance, where the cost is not adequately reflected by compensation based on reduction in market value.[89] The Policy Statement suggests that this is more appropriately dealt with as part of compensation for disturbance.[90]

                4.64             We agree. We see no reason in principle why such costs should not be included within the scope of disturbance in proper cases, nor why this concession should not be extended to non-agricultural businesses. It would be helpful for this to be made clear, by providing that disturbance may include the reasonable costs of such replacements, where required to continue a business on the retained land. The overriding test of “fairness” should ensure that it is not allowed to result in double compensation.  However, we think that this should be treated as an exception to the normal, and therefore dependent on the Tribunal being satisfied that it is reasonable in the circumstances of the case.

(6) Starting date

                4.65             We agree that the starting date for compensation will be as proposed by the Policy Statement. We propose to define this as “the first notice date”, as mentioned earlier in the Report.[91]

(7) Other points of detail

                4.66             Other matters for which the Policy Statement[92] proposes specific provision are:

                                            (1)             Professional fees;

                                            (2)             Businesses ceasing to operate before date of entry;

                                            (3)             Extra tax burdens and loan costs arising from acquisition.

                4.67             We agree that there should be express provision in relation to (1), given that a change of practice is proposed.[93] The others are matters covered by existing case law, where no change is proposed. For the reasons already discussed in Part I, we see no purpose in spelling out such matters of detail, unless there is an intention to change the existing law.  The issue of tax is discussed in more detail in Part VIII.

                4.68             On the other hand, although not dealt with in the Policy Statement, the “consistency principle” should, we think, be set out in the statute. Since “disturbance” is to be expressed as a separate head of compensation, rather than as simply an aspect of “value to the owner”, it needs to be made clear that there should be consistency between the different heads. The LAA (Cth) provides a model.[94] (see Part V, para 5.69 below).

Proposal 4: Disturbance

(1) “Disturbance” means any monetary loss or expense, not directly based on the value of land, suffered or incurred by the claimant and fairly attributable to displacement[95] in consequence of the compulsory acquisition of the subject land;

(2) Without prejudice to the generality of (1), in assessing compensation for disturbance, the following rules apply:

(a) All relevant circumstances are to be taken into account, including any circumstances personal to the claimant;

(b) Disturbance includes the amount of any legal or other professional costs reasonably incurred by the claimant in connection with the acquisition;

(c) Where compensation is claimed on the basis of the relocation of a business from the subject land, compensation on the relocation basis shall not be refused solely because it exceeds the compensation which would be payable on the extinguishment basis,[96] unless, in the opinion of the Tribunal, it is unreasonable in all the circumstances (including the cost to the authority and the value of the business to the claimant) to assume relocation of the business;

 (d) Compensation for disturbance may, if the the Tribunal so determines, include costs reasonably incurred in replacing buildings, plant or other installations (whether or not on the land acquired) where (i) they are required for a business to be continued on the retained land; (ii) the need for replacement is fairly attributable to the acquisition, and is reasonable in all the circumstances ((having regard to the cost to the authority and to the likely benefit to the claimant); (iii) the cost is not adequately reflected in any other head of compensation; but (iv) subject to such deduction (if any) as the Tribunal may determine should be made to reflect any improvement in the facilities so obtained over those replaced;

(e) Compensation for disturbance is not payable for loss or expense suffered or incurred before the first notice date;

(f) Where a claimant who was not in occupation of the subject land incurs incidental charges or expenses in acquiring, within one year of the date of entry, an interest in other land in the United Kingdom, those charges and expenses may be claimed as disturbance;[97]

(3) Without prejudice to (2)(a), the rights of traders over 60 years of age to claim compensation on the total extinguishment basis, in the circumstances defined by the 1973 Act, s 46, will be preserved in the new Code.

Consultation issues

                                           (1)             Do consultees agree that:

                                                                   (a)              The term “disturbance” is a suitable shorthand for all heads of compensation currently assessed under rule (6) (of 1961 Act, s 5)? If not, what term should be used?

                                                                   (b)              Compensation under this head should (as now) exclude any loss “directly based on the value of land”?

                                           (2)             The matters to be taken into account should include “circumstances personal to the claimant”?

                                           (3)             In determining, on the displacement of a business, whether compensation should be on the “relocation” or “extinguishment” basis:

                                                                   (a)              Should the test be a simple test of “reasonableness”, rather than the “reasonable businessman” test (as explained in the Shun Fung case)?

                                                                   (b)              Is it unnecessary for the Code to prescribe the circumstances in which compensation on either basis will be regarded as reasonable?

                                           (4)             Should there be:

                                                                   (a)              Specific provision for compensation to include costs reasonably incurred in replacing buildings, plant or other installations needed for a business, if fairly attributable to the acquisition, and not adequately reflected in other heads?

                                                                   (b)              If so, do consultees agree that:

                                                                                            (i)             The right should apply to all types of business (not simply agricultural);

                                                                                          (ii)             The right should apply whether the buildings are on the land subject acquisition or on retained land?