Part VI          

the no-scheme rule – history

Introduction

The “no-scheme rule”

                    6.1             It is an established principle of compensation law that compensation “cannot include an increase in value which is entirely due to the scheme underlying the acquisition.” This rule, following the name of the case from which this formulation is taken, is often called the “Pointe Gourde rule”.[1] The rule requires the disregard of decreases in value caused by the scheme, as well as increases in value.[2] In other words, the value must be assessed “upon a consideration of the state of affairs which would have existed, if there had been no scheme of acquisition”.[3]

                    6.2             Although the rule was developed by the Courts, its effect has been reproduced, or reflected, in a number of provisions now contained in the Land Compensation Act 1961. They are sections 5(3) (“special suitability”);[4] section 6 (disregard of changes in value due to actual and prospective development);[5] section 9 (depreciation due to prospect of acquisition);[6] sections 14-16 (planning assumptions); and section 17ff (certificates of appropriate alternative development).[7]

                    6.3             Strictly speaking the term Pointe Gourde rule is only apt for the judicial (or “common law”[8]) version of the rule, as opposed to the various statutory versions. Furthermore, as will be seen, there is room for debate whether the Pointe Gourde formulation is, or should be taken as, an accurate statement even of the judicial rule. Accordingly, we have preferred to use the term “no-scheme rule” as a convenient shorthand for all the various manifestations of the rule, both statutory and non-statutory.

The concept

                    6.4             The concept is reasonably simple. For example, a railway scheme may cause blight and reduced land values while it is being planned and constructed. Conversely, the prospect of its use once completed will give the land enhanced value to the promoter (as compared to its existing use value), and may also result in higher land values in the area, for example near new stations. The no-schemerule says that land acquired by the authority for the project should be bought at values which reflect neither the blight nor the enhancement.

                    6.5             The rule was originally developed by the Courts in the 19th century, as part of the principle that compensation should be based on the “value to the owner”, rather than its value for the promoter’s scheme. This was relatively easy to apply in the early cases where the increased value depended on the use of statutory powers only available to the promoter,[9] and where the enabling statute usually defined the scope of the project. However, this simple model was not readily adapted to the more complex schemes, and more general statutory powers, which became the norm in the last century, particularly following the radical reform of the planning system in 1947. After 150 years of evolution, the present law is a complex mixture of statutory and common law rules, with many unresolved conflicts and inconsistencies. 

The policy issues - overview

                    6.6             The apparent simplicity of the concept has meant that the policy reasons for it have rarely been discussed in the cases. Furthermore, although the rule was developed in relation to the disregard of the increases in value, it was assumed without discussion that disregard of decreases was simply the other side of the same coin.  In neither case is it obvious how far, in policy terms, the rule should extend. Before embarking on a detailed discussion, it might be helpful to outline briefly the main issues which will be considered in this Part.  

                    6.7             Disregard of increases in value is for the protection of the acquiring authority. There seem to be two distinct policy reasons. The first is to protect statutory authorities from having to pay artificially inflated prices to acquire land or rights necessary for their functions.  For example, if an essential sewer has to go along a particular route, the landowner should not be able to exploit the public need to extract an inflated price.  However, it does not follow that the interest of the authority should be disregarded altogether, so that he only gets existing use value, particularly where the acquisition is for purposes which are partly commercial.  Some modern statutes (for example, relating to compulsory wayleaves for telecommunications) acknowledge that, although the landowner cannot be allowed to frustrate the public purpose, he should get a fair value, based on what would be arrived at in negotiations between a willing purchaser and a willing vendor.

                    6.8             The second reason arises typically where an authority is acquiring land as part of a wider redevelopment scheme, in which it is investing public funds by way of improvements to infrastructure (such as roads and sewers).  The no-scheme rule ensures that the wider scheme is disregarded, so that the authority is able to acquire the land for the scheme at values which are not inflated by its own investments. 

                    6.9             There are two main problems. First, it becomes necessary to construct a hypothetical “no-scheme world”, which may involve a speculative exercise of “rewriting history”. Second, the wider the “scheme” is drawn, the more the potential for unfairness between those whose land is acquired and those in the same area who retain their land.  Under the modern system of planning control, those whose land is not acquired will see the benefits of any local improvements to infrastructure reflected in the enhanced value of their land, without having to pay any special tax or development charge for that enhancement.  Should the person whose land is compulsorily acquired be worse off in that respect? 

                6.10             When one turns to decreases in value, the object is protection of the landowner, and the policy issues are quite different.  It is common that, in the period before the compulsory acquisition, land values in the area will have been “blighted” by the authority’s plans.  Most people would accept that when the land is acquired it should be at the unblighted value.  In this case, the policy reasons would suggest a wide application of the rule, looking beyond the immediate acquisition. Thus, a small corner shop in an area, affected by plans for redevelopment over some years, may have seen its turnover drastically reduced as people have been relocated from the area under the wider scheme.  When the corner shop itself comes to be compulsorily acquired, fairness would seem to require that compensation be assessed disregarding the effects of the whole scheme, not just the effects of the threat to the shop itself.

                6.11             There is another quite distinct problem in relation to the protection of the landowner. This concerns the question of planning permission.  Where land has been allocated in the local plan for acquisition for a public scheme, for example a highway, it is likely that permission would be refused for any other form of valuable development on that land.  To this extent the owner of the land is disadvantaged as compared to his neighbours, who may have received planning permission for residential or commercial development.  The present law acknowledges that disadvantage by allowing the dispossessed owner to claim the value of any permission which would reasonably have been expected to be granted in the absence of the compulsory purchase. 

                6.12             Here the issues are rather different.  In the first place, there is a question as to whether he should have the benefit of such assumption.  If his land had been allocated as Green Belt, there would have been no question of compensating him for being worse-off than neighbours whose land was allocated for housing.  Under modern planning law, such windfall benefits are accepted as part of the system.  Arguably, therefore, the planning position should be taken as it is in the real world.  Secondly, if one accepts that some such assumptions should be made, what should be their limits?  By the time the land is acquired for the road, the adjoining land may have been developed in a way which makes it impossible to develop the reserved strip for any valuable use.  In such a case should the valuer be required to imagine what would have happened if there had never been any proposal for a road, which in some cases may force him to re-write history over many years?

                6.13             The history of the law of compensation discloses several attempts to grapple with these intractable issues, in cases or statute.  It shows that there is no simple answer, and probably no likelihood of a wholly rational answer. The present law represents a somewhat muddled compromise solution.  Our approach in preparing the new code is to extract from the existing law what seems to us a reasonably coherent and workable version of the existing rules.  We shall explain that approach in the next Part.  In this Part we examine in rather more detail the policy issues which we have summarised, and provide an opportunity for consultees to express views on them.  We also consider whether commercial organisations (including privatised utilities) using compulsory powers should have the benefit of the same rule as public authorities.

The development of the rule

Historical review

                6.14             In the Appendix, we examine the history of the rule in detail, and draw comparisons with similar rules in other jurisdictions. Knowledge of this history is important, both to understand the present law, including the genesis of the present statutory rules, and to provide a firm policy basis for the new Code.

                6.15             We here summarise the main conclusions from that historical review:

                                            (1)             The no-scheme rule has not been subject to a full review by the House of Lords in the 40 years since the restoration of the market value basis of compensation in 1959.[10] The present law rests on Court of Appeal authority, which was based on limited analysis of either the statutes or the earlier authorities.[11] Those earlier authorities included two conflicting Court of Appeal judgments from 1909 (in Lucas),[12] and two apparently conflicting decisions of the Privy Council (the Indian case and Pointe Gourde).[13] The recent decision in Fletcher Estates[14] suggests that, if the scope of the no-scheme rule were now to come before the House, it would be sympathetic to an argument which sought to restrict its more speculative features.

                                            (2)             The clearest, and most authoritative, statement of the rule, which the Privy Council apparently intended to adopt in Pointe Gourde, is probably that of Lord Buckmaster in Fraser v City of Fraserville (1917).[15] What is to be excluded is “any advantage due to the carrying out of the scheme for which the property is compulsorily acquired”. That was said in the context of projects, whose extent was identified by the statute or statutory instrument by which they were authorised, the only factual issue being whether or not they were to be treated as a single “scheme” for the purposes of the rule. The ambit of the rule has been extended and obscured by its rewording by the Privy Council in Pointe Gourde, referring to “the scheme underlying the acquisition”, and its interpretation in later cases, notably which have treated the extent of the “scheme” as a pure issue of fact.

                                            (3)             As for the statutory versions, rule (3) of the 1919 Act[16] has been so narrowly interpreted as to have little practical effect. In any event, the problems to which it was directed, so far as they still exist, seem to be adequately met by the judicial version of the rule. Rule (3) seems to have become effectively redundant.[17]

                                            (4)             Section 9, originally derived from the 1947 Act, requires disregard of decreases in value attributable to an “indication” of the prospect of compulsory purchase. It provides protection against blight caused by the prospect of compulsory acquisition. It was not originally related to the no-scheme rule, but can be seen as a reasonable extension of it.  It is less easy to support its use, as in the second Jelson case,[18] as a foundation for additional planning assumptions not supported by the provisions of the 1961 Act dealing specifically with that issue.[19]

                                            (5)             The other statutory versions date from 1959, re-enacted in the 1961 Act. Section 6 of the 1961 Act appears to have been a genuine attempt to give some shape to the no-scheme rule within the new planning system established by the 1947 Act. It took account of the different circumstances in which compulsory purchase orders might be made, by distinguishing between those for self-contained projects; and those related to more extensive designations, such as comprehensive development areas or new towns. The application of the rule in each case was defined by strict statutory limits. However, because of the uncertainty and complexity of the drafting, literal interpretation was largely abandoned in the cases, and instead section 6 was assimilated to the judicial rule, and treated as part of a single, widely stated principle.[20]

                                            (6)             Most of the provisions of the 1961 Act relating to planning assumptions, other than section 17 (certificates of appropriate alternative development), have proved anomalous or ineffective. Section 17, as interpreted in Fletcher Estates, provides a firm basis for developing a single and exclusive set of rules for planning assumptions in the new Code.[21]

Consultation issues

                6.16             Arising out of the historical review, we highlight five general issues which need to be addressed in considering the form of the no-scheme rule in the new Code:

                                            (1)             What should be the preferred version of the existing rule?

                                            (2)             Should the rule (in some form) be reproduced in the new Code?

                                            (3)             Should the acquiring body’s purpose be entirely disregarded?

                                            (4)             How should the scope of “the scheme” be identified?

                                            (5)             Should there be special rules for “ransom strips”?

                6.17               In this Part we discuss, and seek the views of consultees on, these issues, before we move, in the next Part, to outline our provisional proposals for the new Code.

                6.18               We also raise a separate issue, not directly relevant to the no-scheme rule, but covered by the same group of provisions in the 1961 Act: the rules for “third schedule rights”.

(1) The preferred version of the rule

Variety of formulations

                6.19             Our review of the history has shown that the “no-scheme” rule, though said to be well-established, has appeared in many different formulations. It is useful to start by seeking to identify a “preferred version” of the rule, which can be used with or without adaptation as a basis for its successor in the new Code. The following are examples, from cases or statutes, of some of the different versions of what the valuer has to disregard:

                                            (1)             the “scheme underlying the acquisition”;[22]

                                            (2)             the “very scheme of which the resumption forms an integral part”;[23]

                                            (3)             “the scheme for which the land is proposed to be acquired together with the underlying proposal…”[24]

                                            (4)             “the execution of the undertaking for or in connection with which the purchase is made”;[25]

                                            (5)             the “project on the part of the authority concerned to acquire the land…for some purpose for which it was authorised to acquire it”;[26]

                                            (6)             “the carrying out of, or the proposal to carry out, the purpose for which the land was acquired”;[27]

                                            (7)             “a purpose to which [the land] could be applied only in pursuance of statutory powers”;[28]

                                            (8)             “the fact that compulsory powers have been obtained…”[29]

Three competing views

                6.20             Underlying these differences, but rarely addressed in the cases, is a tension between three entirely different interpretations of the scope of the rule:

                                            (1)             Version (8), derived from the Indian case,[30] is the narrowest. Under that version, the purpose of the acquisition is not ignored; the valuer simply disregards the fact that the acquisition is compulsory, but he takes account of what the authority would have paid in friendly negotiations to acquire the land for the same purpose.

                                            (2)             Version (1), taken from the Pointe Gourde case, as interpreted in later cases, starting with Wilson v Liverpool Corporation, is the widest. The valuer disregards, not only the purpose of the particular acquisition, but also the “underlying scheme”, which may extend to the planning history over a much wider area, and dating back many years.

                                            (3)             Versions (2)[31] to (7) occupy the middle ground. Under these versions, one disregards altogether the immediate project for which the acquisition is made (not merely the element of compulsion), but not the underlying planning history.

                6.21             As we have noted in the historical review, the first version (based on the Indian case) is hard to reconcile with Pointe Gourde, and the authorities since then.[32] If that analysis is accepted, the choice is between interpretations (2) (the “underlying scheme” approach) and (3) (which we shall refer to as the “immediate project” approach).

Competing approaches

Problems of the “underlying scheme”

                6.22             There seems an inherent fallacy in the “underlying scheme” formulation. It assumes that there is a single identifiable scheme “underlying” each compulsory acquisition. The reality is that, once you look beyond the immediate project, there will often be a complex planning history, affecting the general area and the immediate locality, all of which may have contributed to the particular acquisition proposal. There is no purely “factual” criterion by which a rational decision can be made as to which of these is to be treated as “the underlying scheme”.

Two contrasting cases

                6.23             Two modern cases illustrate this point:

                                            (1)             In Bird & Bird v Wakefield MDC,[33]the compulsory purchase order, relating to some 30 acres, was promoted by the District Council for the purpose of industrial development. The order land fell within an area of some 770 acres for which the County Council were proposing plans for investment in reclamation and redevelopment, but without any specific proposals for compulsory purchase. The Court of Appeal confirmed the Tribunal’s finding that the relevant scheme included the county council’s plans, even though they did not “provide for” compulsory acquisition; it was enough that they were part of the “underlying scheme”;[34]

                                            (2)             In Bolton MBC v Tudor Properties,[35] the Council had compulsorily acquired freehold land in the Tonge Valley on the outskirts of Bolton for leisure development by a selected development partner. The Council argued that the underlying scheme went back to the initial regeneration project for the Tonge Valley area, begun in 1980, which included public infrastructure and reclamation works carried out in the 1990s at public expense; the increases in value due to these improvements should be disregarded.[36] The Tribunal and the Court of Appeal rejected this argument:[37] the scheme was limited to the leisure development, preparation for which began in 1995.

                6.24             It is difficult to see any major difference of substance between the cases, to justify the different results. However, because the question was treated as one of fact, the Court of Appeal in the latter case did not find it necessary to comment on the apparent discrepancy, nor to lay down any guidance for the Tribunal for future cases.[38]

Staged schemes

                6.25             Similar problems arise where the immediate project is an extension to a previous development: is the “scheme” limited to the extension or does it include the original development? For example, in a Canadian case[39] the construction of a railway spur line gave the adjoining land potential for industrial use. When part of that land was later acquired for an extension to the spur line, the issue arose whether its industrial value had to be disregarded as due to the same scheme. It was held the scheme was limited to the extension:

… the company had to pay more… because it chose to take two bites at the cherry. The first bite increased the market value of the owner’s land and accordingly the cost of the second bite was based on that increased value.[40]

The immediate project approach

                6.26             The “immediate project” approach avoids some of these problems. For example, if attention had been directed to the immediate project in Bird & Bird, the result would have been different; the “scheme” would have been limited to the District Council’s industrial development. Conversely, in the Bolton case, there would have been the same result; the immediate project was the leisure development, not a regeneration of the whole Tonge valley. In the Canadian case, the immediate project was simply the railway extension. The narrower approach limits the area of inquiry, and is likely therefore to produce a more consistent approach, and to limit the need to rewrite history.

                6.27             There remains the choice between the different forms of the narrower interpretation. None is, or can be, wholly precise. As we have seen, the word “scheme” is capable of narrower or wider applications. Its superficially attractive derivative, the “no-scheme world”, has perhaps led to undue emphasis on the construction of make-believe alternative histories. In any event, if we are attempting to replace all the existing versions of the rule, it is probably better to move away from the most popular current term. The word “purpose”, as in the Australian model, has the advantage of being forward-looking. It could also provide a direct link with the statutory purpose of the acquisition, which has to be identified in the compulsory purchase order itself.[41] However, it is potentially ambiguous: the statutory purpose may be identified in narrow or wide terms (for example, a particular housing development project, or, more generally, “residential development”).

                6.28             On the whole, we prefer the word “project”, which seems to us to direct attention to a particular, future development on a single, identifiable site, of which the acquired land will form an integral part.[42] The link with the statutory purpose is also emphasised by the form in which it is used in version (5): “a project [of the authority] to acquire the land for some purpose for which it was authorised to acquire it”. The rule requires disregard of changes due to the actual or prospective carrying out of that project.

The preferred version

                6.29             We invite responses of consultees, in the light of the historical review, to the following question:

(A) Do consultees agree with our provisional view as to the preferred version of the existing rule: that is, that there are to be disregarded changes in value attributable to the prospect of, or the carrying out of, the project for which the authority is authorised to acquire the land?

(2) Should the rule (in any form) be reproduced in the new Code?

General considerations

Precedent

                6.30             As we have seen, the no-scheme rule, in some form, has been an established part of the law of this country for over 100 years. It is also reproduced in some form in all the systems we have considered from other common law jurisdictions. Furthermore, our discussions with those practising in the field have not suggested that there is any general wish for radical change. The pressure is, not for removal of the rule, but for greater clarity and simplicity.

A planned event

                6.31             Support for this view can also be drawn from a consideration of what compensation is for, in reality rather than theory. In theory, it can be said, compensation is for the effects of a single event, the compulsory taking of land. Compensation makes good the damage caused by that taking, just as damages for personal injury make good the damage caused by another single event, such as a traffic accident. On this view, one would judge the position at the moment of dispossession. Compensation for the land taken would represent the difference between its values, immediately before and immediately after the acquisition. Each of those values would be assessed taking account of all the surrounding circumstances at that moment, including the adverse or beneficial effects, actual or potential, of the authority’s previous activities and future proposals.

                6.32             However, this narrow interpretation does not accord with common sense. Unlike a traffic accident, compulsory acquisition is a planned event. The actual dispossession is realistically seen as the culmination of a planned process, beginning not later than the first formal step in the statutory procedure. Thus it is the consequences of that process, and of the planning proposal, of which the taking is “an integral part”,[43] that need to be assessed to arrive at the true loss.

                6.33             The recent leading cases have adopted that realistic approach, and show that to do so is essential to avoid anomaly and unfairness. Thus, in relation to compensation for disturbance, in the Shun Fung case, it would have caused serious injustice if compensatable losses had been confined simply to the consequences of the dispossession by resumption, rather than (as was held) the threat of dispossession.[44] Similarly, in relation to planning assumptions under section 17 of the 1961 Act (in Fletcher Estates),it was necessary, in order to make the provision workable, to read the statutory reference to the proposal to acquire, as encompassing also the underlying planning proposal.[45]

                6.34             Thus the principle of treating the acquisition and the underlying proposal together as a single “scheme” is valid, and supported by long-established case-law in this country and elsewhere.  The problem is in defining the boundaries of that scheme.

Justification in the cases

                6.35             We have already touched on the possible policy reasons for the rule.[46] The history discussed in the appendix shows that the no-scheme rule, as originally developed, was directed to increases in value, real or speculative, attributable to the statutory powers available to the authority for the development of the subject land. The usual justification given for the rule is that the value should be the “value to the owner”, not to the authority:

Consequently you must not take into account the special need for the land which the authority has and which moved it to obtain compulsory powers. That would be in effect to make it pay for those powers.[47]

However, the application of this reasoning in the modern planning framework has never been examined in any detail.[48] Nor has there been any considered response to Lord Romer’s powerful advocacy, in the Indian case, of a market value approach, which treats the acquiring authority as a willing purchaser in the market.[49]

                6.36             As we have said, it seems to have been assumed that application of the rule to decreases due to the scheme followed automatically, as simply a mirror image of the application to increases.[50] In the Discussion Paper,[51] we questioned that assumption. Our subsequent work and discussions have confirmed those doubts.[52]

Decreases in value

                6.37             In relation to decreases in value caused by the scheme, the policy case for some form of rule seems relatively clear. The rule seeks to protect the dispossessed owner from the effects of blight. He is the unwilling victim,[53] not the promoter, of the scheme. He is required to give up his land for the public purpose; he should not be doubly injured by having to accept a blighted value. Thus, for example, in valuing a corner shop, compulsorily acquired in an area blighted by a redevelopment scheme, fairness requires that the adverse effects of the overall scheme on the value and profitability of the shop should be disregarded, not just the threat of acquisition of the shop itself.

                6.38             Recognition of the need for a rule to protect the dispossessed owner against such blight was not originally related to the no-scheme rule. It seems to date back to a provision of the 1947 Act, which was re-enacted in expanded form in section 9 of the 1961 Act.[54] As we shall see, CPPRAG recommended that this rule should be retained, and extended. We do not understand this proposal to be controversial. We shall consider it in more detail in the next Part.

Increases in value

                6.39             In the Discussion Paper,[55] we suggested that in a modern code there were two principal policy justifications for the rule for disregarding increases in value:

                                            (1)             To protect a statutory authority from having to pay an artificially inflated price for performance of its public functions, where the choice of land is constrained by the nature of the function;[56]

                                            (2)             To facilitate urban regeneration projects, and similar comprehensive planning schemes promoted by public authorities, by protecting them from increases in value caused by their own activities (such as land assembly and infrastructure improvements).[57] 

In each case, the justification for departing from the strict market value approach is that the increases in value are brought about, not by the operation of the ordinary market, but by action carried out in the public interest.

                6.40             Responses to the Discussion Paper have tended to confirm this general appraisal. However, it leaves open a number of questions as to how far such objectives justify a departure from the strict market approach. Those questions are discussed under the next two headings.

Case law or statute

                6.41             We cannot avoid the question whether to reproduce the no-scheme rule in some form. If nothing is said about it, then existing case law will be relied on to apply the judicial version of the rule, by way of interpretation of the new Code.[58] If the rule is to be retained in any form, we have no doubt that, in view of the uncertainty created by the different statutory and judicial versions, it should be in the form of a new provision, or set of provisions, in substitution for all existing versions. Our provisional view is that there should be such specific provision, rather than leaving the issue to further judicial development. Accordingly, we ask:

(B) Do consultees agree (a) that a statement of the no-scheme rule (however named) should in principle be reproduced in the new Code; and (b) that it should be in the form of a new provision, or set of provisions, in substitution for all existing versions.

(3) Should the acquiring body’s purpose be entirely disregarded?

The case for “equivalence”

                6.42             This issue is highlighted by the difference between version (8), based on the Indian case, and all of the other versions. The Privy Council in the Indian case ruled that, in assessing market value, the acquiring body’s proposals were relevant, to the extant that they would have resulted in an enhanced price in friendly negotiations. The only “scheme” to be disregarded was the compulsory nature of the acquisition. The authority had to be imagined as a “willing purchaser”, disregarding only “the disinclination of the vendor to part with his land and the urgent necessity of the purchaser to buy”.[59] That rule applied even where “the only possible purchaser of the potentiality” was the acquiring authority.[60]

                6.43             The preferred version of the rule, however, excludes the acquiring authority altogether from the hypothetical market, and disregards the enhanced value which it might offer. Arguably, this is a departure from the “principle of equivalence”.[61] The market value of land, in a private sale, is not limited to its existing use, in its existing surroundings. It depends on the potential of the land for exploitation, by development or sale, for other uses, and the prospect of enhanced value arising from improvements in the area. Thus, a private developer, acquiring land for a project, does not expect to be able to buy it at existing use value; the price will take account of the development potential. The mere fact that the enhanced value is attributable to the developer’s own scheme does not change the position. “Equivalence” should, arguably, put an acquiring authority in the same position.

Privatised utilities

                6.44             The issue is given added significance by the changing balance between public and private interests in the use of compulsory purchase. In the Discussion Paper, we drew attention to the fact that, since privatisation, many “public” services are now provided by privately owned, profit-making bodies, and suggested that in this respect we have come back “full circle” to the position of the 19th century railway companies.[62] In the light of the responses, we accept that this may be an over-simplification. Although privately owned, the modern utility companies perform the same essential public service as the nationalised bodies; public ownership has been replaced by public regulation, which controls standards of performance and prices.

                6.45             Nonetheless, the commercial element in such activities, even though regulated by statute, is recognised in some of the statutory schemes governing compensation for exercise of compulsory powers. For example, the Telcommunications Act 1984, which gives operators powers to lay cables in private land, provides that the compensation shall be governed by:

… such terms with respect to the payment of consideration… as it appears to the court would be fair and reasonable if the agreement had been given willingly….[63]

In a case concerning Mercury Communications, it was held that this required the court to exercise “subjective judicial opinion” as to the price which would have been arrived at in friendly negotiations, applying an approach similar to that in the Indian case.[64] However, there is little consistency in the different statutes, as we explain in Part VIII, when dealing with compensation for the acquisition of rights.[65]

                6.46             This is not a new issue. Rule (3) of the 1919 rules was designed to exclude enhanced value attributable to the exercise of statutory powers. However, it is noteworthy that, in its original version, it did not extend to statutory bodies “trading for profit”. It was not until the 1961 Act that it was altered to apply to all bodies exercising compulsory powers.[66] Thus, in the present rule no distinction is made between privatised utilities operating for profit, and public authorities. However, a recent review for the Scottish Executive has reopened the issue, by suggesting that privatised utilities should be required to obtain a “public interest certificate”, if they wish to continue to benefit from the application of rule (3).[67] Although it is open to question whether rule (3) itself is a suitable means of achieving the purpose of this suggestion,[68] a similar result could be achieved by a restriction on the scope of the new no-scheme rule. We invite views on this question.

Commercial interests

                6.47             In any event, compulsory acquisitions will differ widely in the extent to which they are driven by primarily commercial motives. An example of mixed public and commercial motives is where land is compulsorily acquired by a local authority under the Planning Acts,[69] with a view to assembling a site to hand over to a commercial developer, who may be funding the costs and taking the bulk of the profit. More predominantly commercial is a case where an industrial concern is acquiring land under the Transport and Works Act for a link from its factory to a railway. In such a case, there may be a public interest sufficient to justify compulsory powers (removing heavy traffic from the roads); but the project is essentially commercial rather than public in nature.

                6.48             Such issues can cause controversy. For example, Barry Denyer-Green notes that during the passage of the Channel Tunnel Bill in 1987, there were objections to the application of the ordinary rules to land acquired for commercial purposes:

Some of the land taken under the Act was to be used for commercial activities in the hands of commercial companies; desirable for the success of the tunnel but not strictly essential for its construction. Many of the affected land owners considered that their compensation should, contrary to the normal rule, reflect the value of the strictly commercial aspects of the project.[70]

                6.49             Similarly, in the recent Waters case, the President referred to the attractions of the approach taken in the Indian case, where the acquiring authority is “a commercial utility rather than an arm of central or local government”.[71] Although the owner of such land should not be able to frustrate the public purpose, or hold the authority to ransom, that does not require compensation to be limited to existing use value.

                6.50             The issue is not whether compulsory powers should be available for such purposes. The Policy Statement noted and rejected an argument that compulsory powers should not be available as a means to enhance profits of private companies:

As CPPRAG pointed out, such arguments seem to be based on a misunderstanding of the fact that no acquiring body can exercise its compulsory purchase powers simply to enhance its profits and without establishing that such action is necessary in the public interest. Indeed, it was for such public welfare reasons that the first compulsory purchase powers were granted, - to privately owned companies, - for the development of railways and other major infrastructure schemes during the nineteenth century.[72]

                6.51             However, it does not follow that the compensation rules should be the same irrespective of the ultimate purpose of the acquisition. Where the effect of the compulsory purchase is to transfer the development potential of land from one private interest to another, there may be no obvious reason why, under the market value principle, the value of that potential should be excluded.

A wider issue

                6.52             We have already identified our “preferred” version of the existing rule. We recognise, however, that this may be said to imply a departure from a strict market-value approach (and arguably from “equivalence”), as well as a departure from one interpretation of the no-scheme rule, as approved by the Privy Council (in the Indian case). The question whether to return to the approach of the Indian case - in all or some cases (and, if so which) - raises wider policy issues than it seems possible or appropriate for us to address in the present project.

                6.53             We invite the views of consultees on the following questions:

(C) Should the no-scheme rule, in its application to increases in value, be modified so as to enable regard to be had to the amount which the acquiring body itself would have paid in friendly negotiations (in accordance with the Indian case):

                                                                   (a)              In all cases?

                                                                   (b)              In cases where the acquisition is for purposes of a “commercial” nature?

                                                                   (c)              In no cases?

If the answer is (b), then:

                                                                                            (i)             How and by what criteria should such “commercial” cases be defined?

                                                                                          (ii)             Do consultees favour a “public interest certificate” mechanism (as proposed in the Scottish Executive Review[73])?

 (4) What is the scope of the scheme?

                6.54             Also linked to the first issue, but in this case to the choice between the preferred rule and version (1), is the problem of defining the scheme, in space and time, in the context of the modern planning framework.

The pre-1947 cases

                6.55             This was not a significant problem in the cases before the 1947 Act. Most of the early cases related to single projects, which were clearly defined by the enabling statute. In some cases, the issues were a little more complex, but there was still a direct link with the scope of specific statutory powers. Thus, for example:

                                            (1)             In Cedars Rapids,[74] three separate “subjects”, which were to be linked by the authority’s hydro-electric works, were treated as part of a single “scheme” along with the connecting works in the river-bed; but the whole scheme was governed by specific statutory powers.

                                            (2)             In Fraser,[75] there was an issue whether two related statutory projects (the reservoir and the falls) were to be treated as one scheme or two. Although the Privy Council categorised this issue as one of “fact”, it was a very narrow one. There was no suggestion that the factual inquiry could extend beyond the scope of the authorising statutory instruments.

                                            (3)             In Pointe Gourde itself,[76]the issue was treated by the Privy Council as foreclosed by a finding in the Case; but it seems that there was a single instrument under the relevant Ordinance, authorising acquisition of land for both the quarry and the naval base.

Wilson and after

                6.56             The issue became much more important under the modern system in which the particular acquisition is usually made under general, more flexible powers of acquisition, exercised within a broader planning framework. A particular compulsory purchase order is more likely to be linked to wider proposals, not necessarily dependent on compulsory purchase, or on any specific statutory authorisation. Such a case was Wilson v Liverpool Corporation (1971) where compulsory powers were needed for only a quarter of the overall development project, the remainder being on land acquired by agreement and developed under an ordinary planning permission.[77]

                6.57             In that, and subsequent cases, the Courts continued to treat the identification of the scheme as an issue of fact, entrusted to the Tribunal, and not reviewable short of perversity.[78] However, the issue had become much more open-ended than in the pre-1947 cases, since there ceased to be any need for a direct link with a specific statutory authorisation. This was, in one sense, a natural development. Under modern powers, there is no necessary identity between a particular compulsory purchase order, and the project of which it forms part. Compulsory purchase is often confined, as in Wilson, to those parts which cannot be acquired by agreement. It would be odd if that factor were to alter the basis on which compensation were assessed.

                6.58             On the other hand, by adopting the Pointe Gourde formula (the “underlying scheme”) the open-ended nature of the inquiry was widened still further. Apart from the uncertainty of the test, this creates two practical problems. First, the wider the scheme is drawn, the more the room for speculation, and the need for “rewriting history”. Secondly, the more the scheme extends beyond the area subject to compulsory acquisition, the greater the potential for unfairness: as between those dispossessed by the acquisition, who are deprived of any enhancement of land value due to the scheme; and others, in the same area, who retain their land, and are able to sell in the open market at values reflecting that enhancement.[79]

                6.59             It is right, however, to note that even under our preferred approach,[80] the result, on the facts of Wilson, would probably have been the same. There was a single development project, covered by a single permission, for the whole 391 acres, and the whole area could properly have formed the subject of a single compulsory purchase order. The area of the actual order was dictated purely by the authority’s lack of success in negotiating its purchase, and did not reflect a difference in the purpose of the acquisition. The apparent unfairness arose, not from differential treatment of land within that area, but from the fact that the development gave enhanced value to land outside the development area, which the dispossessed owners within it could not enjoy.

Variety of projects

                6.60             This problem is magnified when one bears in mind the variety of projects which may have to be considered, for example:

                                            (1)             The size may vary from a small site, say, for a school; through to a vast complex, such as an airport, to a complete new town;

                                            (2)             It may be a self-contained project; or (in the case, for example, of an airport) may have complex associated infrastructure requirements, such as highway and railway links, sewage treatment plants etc;

                                            (3)             The project may be limited to one locality; or be part of a linear project extending over a large distance (for example, a railway, motorway or pipeline); or part of a national network (such as a telecommunications network);

                                            (4)             It may be a single project or one developed in stages (whether in accordance with a pre-conceived plan, or by subsequent additions or modifications);

                                            (5)             It may be a minor addition to a much larger project (for example a new side road link to a motorway);

                                            (6)             It may be a new initiative, or a new stage in a wider scheme which has been developed over many years (for example, a new reclamation project within the Docklands Development area, a motorway widening scheme, an extension to an established new town).

                                            (7)             The different parts of the project may be included in one compulsory purchase order, or may be the subject of separate orders under different powers; and the orders may be promoted as part of the same proceedings, or separately.

                6.61             Furthermore, in any of these cases, an individual compulsory purchase order may comprise the whole of the area needed for the project; or that needed for a particular stage of the project; or simply isolated parcels of land needed to complete a development site, the bulk of which has already been acquired.

The planning framework

The 1959 Act

                6.62             An alternative approach is to follow the early cases, by linking the definition of the scheme to a statutory source. This was the approach of the 1959 Act (now section 6 of the 1961 Act).[81] It linked the statutory version of the rule directly to areas or designations defined by or under the Planning Acts.  Case 1 was confined to the area of the particular compulsory purchase order. The other Cases extended it to cover specific statutory designations, such as comprehensive development areas, and new towns. This reflected the philosophy of the 1947 Act, under which such statutory designations were expected to provide the framework for most of the major development projects for which compulsory powers might be needed. The planning system which gave effect to this philosophy remained largely intact at the time of the 1959 Act.

                6.63             Such a statutory link was in principle a faithful reflection of the no-scheme rule as originally developed. However, it proved too rigid for the planning system as it then evolved. As Wilson showed, Case 1 was too narrow; it gave unjustifiable significance to the area of the particular order, regardless of the circumstances in which it came to be so drawn. Conversely, the other cases were too broad, and unlimited in time. For example, on an acquisition within a new town area, the effects of the designation had to be disregarded, if the particular project could be said to be “in the course of the development” of the new town, however limited the scope of the particular project, and however long after the original. This led to unrealistic demands for re-writing history, and to potential unfairness, as between those subject to compulsory purchase, and those (also within the designated area) able to sell in the private market.

Certifying the planning project

                6.64             It would be possible to adapt and extend Case 1 of the 1961 Act, so as to be consistent with the preferred rule, but providing greater certainty. The main problem arises where a particular compulsory purchase order relates, not to the whole site of a single, self-contained project, but to only part of the area required for the project. This was the case in Wilson. Since it is the authority in such cases which is seeking to argue for a wider area than the area of the order itself,[82] there is no reason why it should not be required to make its position clear in the order itself.

                6.65             The authority is already required to state in the compulsory purchase order the “purpose” of the acquisition.[83] It would be possible to make that requirement more specific, where the authority wishes the acquisition to be treated (for compensation purposes) as part of a “project” extending beyond the boundaries of the particular order. In such case, it could be required to certify that fact in the order, and specify the nature and extent of that project (in space and time). This definition of the project would provide a starting-point for determining what is to be disregarded in the assessment of compensation.

                6.66             Although such a definition could be made binding on the authority itself, there would need to be an opportunity for challenge by the owner. This might be regarded as an appropriate issue for the confirmation inquiry, which would enable the scope of the “project” to be settled by the confirming authority at the outset. However, this might have the effect of delaying a decision on the order itself by introducing issues more relevant to the compensation stage. If so, the owner should (as now) be able to challenge the authority’s identification of the project before the Lands Tribunal. We invite comments on this issue.

The new planning system

                6.67             Any statutory variation of the preferred version of the rule must take account of the modern planning framework, including the Government’s current proposals, as set out in the recent Green Paper.[84]

                6.68             The present hierarchy of structure, local and unitary development plans is to be replaced by a new single level of plan known as a “Local Development Framework”. This will comprise a “statement of core policies” setting out the local authority’s strategy in promoting and controlling development, together with

… more detailed action plans for smaller local areas of change, such as urban extensions, town centres and neighbourhoods undergoing renewal.[85]

One category of action area would include “area master plans”:

… comprehensive plans for a major area of renewal or development covering design, layout and location of new houses and commercial development supported by a detailed implementation programme.[86]

                6.69             The Planning Green Paper does not spell out in any detail the extent to which compulsory purchase is expected to assist these objectives. This issue is touched upon in the Compulsory Purchase Policy Statement, which was published at the same time. It draws parallels with the functions of Urban Development Corporations (which were one of the cases specified by the 1961 Act section 6).[87] However, the intention is not, it seems, to rely on specific designations,[88] but rather:

to make a radical change in new legislation by replacing the powers in section 226 (of the Town and Country Planning Act 1990) by a new provision which would define a full range of planning and regeneration purposes, including halting the physical, economic and/or social deterioration of an area, for which a local planning authority could use its compulsory purchase powers.[89]

                6.70             In seeking confirmation for an order, the acquiring authority will have to establish that the public interest in acquiring the land outweighs private rights, and to show why they need the land and “in broad terms the purpose for which it will be used.”[90] Two suggested options for this purpose are:

(i) a policy based approach – by reference to the core policies in the authority’s Local Development Framework (as proposed in the Planning Green Paper), or those in the Community Strategy;

(ii) through the designation of sites in action plans adopted as part of the Local Development Framework (see Planning Green Paper).  If the proposals for rapid adoption and review of such plans proposed in the Green Paper are adopted, this would provide an obvious means of establishing a clear rationale for the compulsory acquisition…[91]

A further option is that the Secretary of State might have power to specify by order the matters to which he will have regard in deciding whether to confirm section 226 orders. The Policy Statement invites further suggestions.[92]

Linking the compensation rules to the planning system

                6.71             The Commission is not directly concerned in this aspect of the Government’s proposed reforms. However, it is desirable that, in drawing-up detailed proposals for this new planning regime, thought should be given to its relationship to the compensation rules. For example, it would be possible to provide for the new powers to be exercised, in appropriate cases, by reference to development proposals, or special development zones,[93] identified in an action plan. Where the acquisition is within such a zone, compensation would be assessed disregarding any increases in value attributable to carrying out, within a defined period, the purposes of the development zone.

                6.72             Detailed consideration of such ideas must await the Government’s final decision on the form of the new planning system, and of the associated compulsory purchase powers.

Defining the scheme in the new Code

                6.73             On balance, notwithstanding the difficulties discussed above, we think that the preferred rule provides a generally fair and workable basis for defining the scheme. Although the rule has to be applied to a wide variety of types of project, there are advantages in simplicity. An over-complex set of rules is likely to bring its own problems (as the 1961 Act shows).

                6.74             Indeed, notwithstanding the theoretical problems, we have gained the impression from our discussions that the application of the rule does not generally cause concern or difficulty. The cases which have reached the courts tend to be extreme examples, in which one of the obstacles has been the uncertain interaction of the various versions of the rule.[94] Replacement of this statutory clutter with a simple statement of the preferred rule could do much to remove the uncertainty. Commonwealth experience appears to support the view that, under such a statement, defining the scheme does not give rise to frequent controversy.

                6.75             Our provisional view, therefore, is that the preferred rule[95] provides a suitable basis for defining the scheme in the new Code. However, we also see merit in requiring the authority, in cases where it wishes to contend for a wider scheme than the area of the particular order, to define its version of the scheme in the order itself.  Such a proposal would need to be linked with the statutory provisions relating to the making of orders, which are not part of the present reference.[96]

                6.76             Accordingly, we invite views on the following:

(D) Do consultees agree with our provisional proposal that:

                                           (1)             In the new Code, the preferred rule (in a statutory form) should be used as the basis for defining the “scheme”?

                                           (2)             Alternatively, or in addition, should consideration be given to either of the following:

                                                                   (a)              Where an authority is promoting the compulsory purchase order for the purposes of a project including land other than that comprised in the order, the authority should be required (for valuation purposes) so to certify in the order, identifying the nature and extent of the project?

                                                                   (b)              If so, should the owner’s right of challenge be:

                                                                                            (i)             At the confirmation stage (by objection to the confirming authority) or

                                                                                          (ii)              Before the Lands Tribunal?

                                           (3)             Should provision be made, in the Government’s proposed new planning framework, to enable the definition of the “project” for compensation purposes to be linked (where appropriate) to development proposals, or development zones, identified in Action Area plans?

(5) Ransom strips

The problem

                6.77             Finally, under this section, we draw attention to a related issue, discussed in the historical review,[97] that is the application of the no-scheme rule to acquisitions of land for access for larger development areas, where the opportunities for access are limited by physical or planning factors. The law appears to be that, in such cases, the owner of the land required for the access will normally be able to claim, as part of the compensation, a share of the development value released. The no-scheme rule does not exclude it, because the value is not dependent on development of the larger area by a public authority, but would apply equally if the land were developed privately.

                6.78             Although the law is apparently settled, its application in practice can cause uncertainty and difficulties of valuation, and the figures arrived at can seem somewhat arbitrary. The choice of the appropriate access for a major development will usually be based on both physical and planning factors, and may be the subject of special financing agreements between the developer and the relevant authorities, including provision for compulsory purchase of the necessary land. It is may be impossible for the parties to judge in advance the likely cost of the access arrangements.[98]

Other examples

                6.79             The problems generally arise in relation to road access, but in theory they could arise in relation to connections to other essential services. However, the law does not appear to be consistent in this respect. In many cases, where all that is needed is a wayleave or easement, it appears to be accepted that the owner should be compensated simply for any actual damage, and not for the loss of his negotiating position. In some cases, on the other hand, a share of market value is expressly permitted.[99]

                6.80             A parallel may also be drawn with the compensation rules relating to projects which breach existing rights over the subject land, such as restrictive covenants.[100] In the real world, the owner of a restrictive covenant preventing development has a strong negotiating position, represented by his ability to frustrate a valuable development. In some cases such a right has been held to be worth as much as 50% of the development value.[101] However, there is no rule that such an amount is recoverable as compensation, following a compulsory purchase order. The normal rule is that no compensation is payable until the interference takes place, and that the valuation is based on diminution in value of the claimant’s land, not a share of the authority’s profits.[102]

A policy issue

                6.81             Again this raises an issue of policy, not so far addressed by CPPRAG or in the Government Policy Statement. In the Discussion Paper, we suggested that the law was now settled, and made no proposals for change. However, some of the responses to the Paper have identified this as an important issue which requires attention in the new Code.

                6.82             It would be possible to provide that, where land is required solely for access or otherwise for provision of services to serve other new development, the compensation should exclude any element based on the value of the new development. However, the details would require careful consideration. It might be desirable to limit the provision to cases certified by the authority as of special importance to the planning of the area. It might also be appropriate to “sweeten the pill” for the dispossessed owner, by providing some uplift to compensation based purely on existing use value. [103]

                6.83             Our present view is that no such departure from the ordinary rule is justified. However,  we invite views on the following questions:

(E) Should provision be made that:

(1) In defined circumstances, where land is required solely for access or otherwise for provision of services, to serve other new development, the compensation should exclude any element based on the value of the new development?

(2) If so, (a) how should those circumstances be defined, and (b) to what qualifications should they be subject (e.g. a defined uplift to existing use value)?