Part VIII                       
compensation- related issues

Introduction

                    8.1             In this Part we consider certain incidental issues which might be thought appropriate for inclusion in the Compensation Code. Those for which we make proposals as part of the present project are:

                                            (1)             Compensation for interference with rights;

                                            (2)             Compensation for acquisition of rights;

                                            (3)             Advance payments;

                                            (4)             Lands Tribunal extended jurisdiction;

                                            (5)             Interest on compensation.

                    8.2               We explain our reasons for not including the following:

  (6)     Tax;

  (7)      Subsequent planning permissions;

  (8)      Additional loss payments;

  (9)      Disturbance payments;

  (10)    Compensation for minor tenancies.

(1) Compensation for interference with rights

Easements and covenants

                    8.3             In this section we are concerned with the effect of works carried out by the authority on land (“the servient tenement”),[1] which is subject to an easement (such as a right of way) or a restrictive covenant (for example, a restriction on building work) in favour of land owned by the claimant (“the dominant tenement”). In such a case, the authority’s work may interfere with the easement or breach the covenant, in a way which would, apart from statutory authority, give rise to a claim for an injunction or damages at common law.  Under the present law, the authority does not need to acquire or extinguish the right; nor is any notice to treat[2] required. Instead, the claimant has a right to compensation, if and when the interference or breach takes place. Compensation is governed by section 10 of the 1965 Act, under the same rules as for injurious affection where no land is acquired.[3]

                    8.4             The courts have held the following rights (amongst others) to be compensatable interests under these rules:

                                            (1)             private rights of way;[4]

                                            (2)             obstruction of rights of light;[5]

                                            (3)             prescriptive rights of support;[6]

                                            (4)             rights of access from private land to the public highway.[7]

                    8.5             Compensation is based on the diminution (if any) in value of the dominant tenement. Arguments that the compensation should reflect a share of any development value released on the servient tenement,[8] were rejected by the Court of Appeal in Wrotham Park Settled Estates v Hertsmere Borough Council.[9]

                    8.6             Under these rules, the authority itself may, subject to paying compensation, lawfully interfere with the rights by virtue of its statutory powers.[10] However, it seems that (subject to any special statutory provision) the rights as such are not extinguished. They remain binding on the title (in effect in suspension) and may affect successor owners if the authority in due course disposes of the land.[11]

Discussion

                    8.7             This issue is not discussed in the CPPRAG Review or the Policy Statement. It is open to question whether it is appropriate in this context to apply the rules for injurious affection where no land is taken. Although the right is not acquired or extinguished as such, the effect from the owner’s point of view is very similar. He is deprived of the potential value of an interest in the subject land, which, in the absence of statutory intervention, he would have been able to turn to account in negotiations with anyone wanting to develop that land. It seems somewhat anomalous, therefore, to equate him with a person from whom no land is acquired.

                    8.8             Furthermore, the rule restricting compensation to the damage (if any) suffered by the dominant tenement may be thought to conflict with the principle of equivalence. Arguably, the owner’s loss is not confined to that damage, but also includes the price that he could have negotiated for release of the right in private negotiations with a developer of the servient tenement.[12] That represents the “market value” of the right, to which he would be entitled under rule (2)[13] if this were treated as an acquisition of land. However, the restrictive rule has been affirmed recently, after detailed consideration of the case law, by the Tribunal and the Court of Appeal in the Wrotham Park case. Furthermore, a similar rule has been applied to compensation for release of covenants under section 84 of the Law of Property Act 1925.[14] As will be seen below, a similar issue arises in respect of acquisition of new rights.

                    8.9             Our proposals for the new Code reflect our understanding of the existing law. However, we invite views on whether there should be a separate right to compensation for interference with rights (not linked to the rules for injurious affection); and whether it should include compensation for loss of the “market value” of the right, as discussed in the previous paragraph.

Proposal 11: Interference with easements etc.

(1) Where the carrying out of the purpose for which the subject land is acquired results in interference with, or breach of, any easement, restrictive covenant or other right affecting the subject land, which is attached to other land, compensation shall be payable under this Proposal.

(2) Compensation under this proposal shall be assessed by reference to the reduction (if any) in the market value of the land to which the right is attached, so far as attributable to such interference or breach.[15]

Consultation issues

                                           (1)             Do consultees agree that compensation for interference with easements or other rights should be separated from the rules for compensation for injurious affection where no land is taken?

                                           (2)             In any event, on what basis should compensation be assessed? In particular:

                                                                   (a)              Should compensation be based (as now) solely on diminution in the market value of the land  to which the right is attached; or

                                                                   (b)              Should it reflect the “market value” of the right itself (that is, the amount which would have been paid for release of the right in negotiating between willing parties)?

(2) Compensation for acquisition of rights

Introduction

                8.10             A statutory power to acquire land does not of itself confer power to acquire new rights in the land. Apart from special provision in the Act, such a power authorises the acquisition of existing interests, not the creation of new interests.[16] However, there are many statutes which confer powers to acquire new rights, particularly in relation to the requirements of utilities, for example for electricity lines or sewers. The rules relating to the acquisition of rights will vary depending on the nature of the acquiring body, and in particular whether what is required is an easement or a wayleave.

                8.11             It is not possible or appropriate for these issues to be addressed in detail in the present project, which is concerned with establishing a standard Code. CPPRAG recommended that further work should be undertaken, in consultation with the various utilities and their sponsoring departments, to standardise as far as possible the arrangements for acquisition of rights and assessment of compensation.[17]  The issue is not addressed in the DTLR Policy Statement, but work is said to be continuing.[18] Pending such a detailed review, it is appropriate that the Code should include a standard provision for compensation for acquisition of rights, while recognising that it may be disapplied or modified by statutes dealing with particular subjects.

                8.12             A possible model for acquisition of rights is in the Local Government (Miscellaneous Provisions) Act 1976, section 13. This applies only to compulsory purchase powers exercised by local authorities.[19] Where a local authority could be authorised to acquire land compulsorily for any purpose, it may be authorised to acquire for that purpose “such new rights as are specified in the order.”[20] The Act sets out the modifications to be made to the 1965 Act, and the other enactments dealing with compensation. These provide a suitable starting-point for the new Code.

Right to compensation under the 1976 Act

                8.13             The 1976 Act provides generally that the enactments dealing with compensation are to apply “with the necessary modifications”.[21] More detailed guidance can be found in Schedule 1, which makes specific modifications of the 1965 Act. Section 7(1) (compensation for injurious affection) as modified reads:

In assessing the compensation to be paid by the acquiring authority under this Act regard shall be had not only to the extent, if any, to which the value of the land over which the right is purchased is depreciated by the purchase but also to the damage, if any to be sustained by the owner of the land by reason of injurious affection of other land of the owner by the exercise of the right.[22] (emphasis added)

The first group of words in italics replace the words “the value of the land to be purchased by the authority” in the 1965 Act. Thus it seems clear that the basic measure of compensation is the depreciation in value of the land over which the right is acquired, not a notional market value of the new right.[23] Furthermore, the second group of words in italics replaces a reference to both “severance” and “injurious affection” in the 1965 Act. Accordingly, compensation for severance is apparently excluded. [24] It is not clear why this should be so, unless it is assumed that, in the context, there is no practical distinction between severance and injurious affection.

                8.14             On the other hand, it seems that section 5(6) of the 1961 Act (which preserves the rules for compensation for disturbance) is intended to apply, as one of the “enactments relating to compensation for compulsory purchase”.[25] 

 “A compensation lottery”

                8.15             The limited compensation rights given by the 1976 Act are similar to those given by a number of other statutes which confer compulsory powers to acquire easements. For example, the Gas Act 1986 gives compulsory powers to public gas transporters to acquire pipeline easements. Compensation, as under the 1976 Act, is limited to the amount of depreciation in the value of the land through which the new right is acquired.[26]

                8.16             Other statutes are more generous. For example, the statute may require “full compensation to any person who has sustained damage” due to the works; such words have been interpreted as allowing a claim for loss of profits caused by obstruction to a garage during construction of a sewer.[27] Alternatively, it may go further and require the payment of “consideration” for the grant. Thus, the Telecommunications Act 1984, which confers rights 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.[28]

This was held  to require an element of “subjective judicial opinion”, not restricted by the compulsory purchase rules.[29]

                8.17             These, and other variations on the theme, have been examined recently in a valuable study by Norman Hutchison and Jeremy Rowan-Robinson.[30] They rightly describe the current law as “a compensation lottery”. They also comment on the results of their interview survey, which suggested that

There is too little experience of contested claims arising from compulsory access to be clear just how far these measures actually differ in practice and how they affect valuation.[31]

To provide further illustrations and a basis for discussion, we reproduce the article in full in Appendix 7 (with the kind consent of the authors).

                8.18             As they say, a critical issue, which is one of political choice, is whether the landowner should be paid some form of “consideration” for the wayleave or easement, or whether he should simply be entitled to the “financial equivalent of his loss”. Their researches showed that voluntary settlements commonly included an element of consideration. A percentage of market value is used reflecting, in part, the gain to the utility-promoter. On this issue they conclude:

The authors believe that an element of consideration would be consistent with the privatisation of utilities. It would also be consistent with the position which applied in the nineteenth century before the utilities were brought into the public sector. It is arguably also fair that those affected should receive some recognition beyond their financial loss; and experience in practice suggests that there could be advantages for the utilities in terms of a speedy settlement.[32]

                8.19             The Policy Statement indicates that work is proceeding within Government on this issue. We cannot anticipate the conclusions of that work. CPPRAG recognised the practical problem of basing payments on “actual or projected profits or risks associated with specific schemes”; and that it might result in some claimants receiving “disproportionate benefits. On the other hand, they said the legislation should “avoid being too prescriptive” in defining the market value of access rights.[33]

                8.20             Our provisional Proposal, in producing a standard Code, is to adopt the existing model of the 1976 Act (based on the depreciation in value of the land). We recognise, however, that for voluntary acquisitions, in many cases, a more generous approach is adopted. We therefore raise specific consultation questions on the possible alternatives, and their financial and practical consequences.

Proposal 12: Acquisition of rights

Where the interest acquired is a right over land (including a newly created right):

(i) The value of the right shall be assessed by reference to the depreciation, if any, in the market value of the land over which the right is acquired;

(ii) Other heads of compensation (disturbance, injurious affection but not severance) shall be allowed under the ordinary rules (see above).

Consultation issues

                                           (1)             Should the compensation for acquisition of new rights be assessed:

                                                                   (a)              As now by reference to the diminution in the value of land or,

                                                                   (b)              By reference to the “market value” of the right (that is, the amount which would have been paid for grant of the right between willing parties)?

                                           (2)             Should compensation for severance be allowed? If so, in what circumstances could it arise (other than those covered by injurious affection)?

(3) Advance payments

Existing law

                8.21             The 1973 Act gives the dispossessed owner a right to an advance payment from the authority on account of compensation, pending final agreement or determination.[34] The request must be made in writing, and be supplemented by such particulars as the authority reasonably require to make an estimate of compensation. The amount of the advance payment is 90 per cent of the authority’s estimate (unless an amount has been agreed between the parties). Payment must be made not later than three months from the date of the request, or (if later) on the date of the taking of possession.[35] If, when compensation is determined, the advance payment is too high, the excess must be repaid.[36]

                8.22             The 1973 Act contains other detailed rules which it is unnecessary to set out here. In addition amendments were made by the 1991 Act, including provision for the payment of accrued interest on the amount by reference to which the advance payment is calculated.[37] Two points on the detailed rules may be noted:

                                            (1)             By section 52(6) the authority’s obligation to make an advance payment does not apply if there is an outstanding mortgage exceeding 90% of the authority’s estimate of compensation; and if the mortgage is less than 90% the authority can reduce the payment by the amount they think will be needed to redeem the mortgage

                                            (2)             There is no specific provision for enforcement of the duty to make an advance payment.

Policy Statement

                8.23             The Policy Statement, in line with recommendations of CPPRAG, proposes that the machinery for enforcing the duty should be strengthened:

We agree that claimants must not be unduly disadvantaged by being subjected to protracted delays before receiving any actual payment following the date of taking possession. We therefore intend to impose a duty on acquiring authorities to notify each claimant on the date of taking possession of his right to claim… There may also be a case for providing a means of ensuring that advance payments, once requested, are actually made by authorities. This is a matter to which the Law Commission will be giving further thought.[38]

                8.24             The Policy Statement did not accept a CPPRAG suggestion that the Lands Tribunal should be given a discretionary power to determine the amount of the advance payment:

… it could simply amount to requiring the Lands Tribunal to consider the same issues twice-over; and… it may not always be practicable for the Lands Tribunal to make a fair assessment in advance of other decisions on substantive matters associated with the claim. It does not therefore seem to represent a sensible use of the Lands Tribunal’s resources.[39]

                8.25             It was also proposed to amend section 52(6) to enable the authority, with the agreement of the owner and mortgagee, to make the advance payment direct to the mortgagee.

The new Code

                8.26             The provisions of section 52 and 52A should be included in the new Code, subject to amendment of section 52(6) as proposed by the Policy Statement.

                8.27             In the absence of any specific machinery for enforcement, there is in principle a right to seek judicial review in the High Court.[40] However, this may seem unduly elaborate for what is usually a local issue, requiring a local, quick, and economical remedy. Furthermore, where the problem is the authority’s failure to make an estimate, either at all, or at a reasonable level, the High Court’s powers do not allow it to set the amount. It can only require the authority to make an estimate, or quash an estimate which is found to be wholly unreasonable.[41]

                8.28             There is no easy answer to this problem. If the Lands Tribunal is not to be used, the only obvious alternative is the County Court. It could be given statutory power, on application by the claimant, to enforce the authority’s obligations in respect of advance payments. It would probably not be appropriate for the County Court to take over the task of making an estimate, which would not be a normal role for the Court, and would be likely to require detailed expert evidence. However, it could exercise a supervisory role similar to judicial review, not only to require payment once an estimate had been made, but also to review the “reasonableness” of the estimate.  Furthermore, it could  adjourn the proceedings to allow a revised estimate to be made.  Thus, although it would not be making the estimate itself, it could in practice bring considerable pressure on the authority to comply with its duty under the Act.

                8.29             The County Court would not be unsuitable for such a review function. It already exercises a form of judicial review jurisdiction in certain housing matters.[42] It also has a more general jurisdiction to grant “appropriate remedies” for breaches of the Human Rights Act 1998.[43] This may cause it to be involved in disputes relating to the process of compulsory purchase, quite apart from any specific jurisdiction. For example, as we have noted above, undue delay in providing compensation for compulsory purchase may give rise to a breach of the Act.[44] A power to supervise the machinery for advance payment of compensation would be consistent with that role.

Proposal 13: Advance payments

The claimant shall be entitled to an advance payment on account of compensation and interest, in accordance with sections 52 and 52A of the 1973 Act (which will be incorporated into the Code), subject to the following:

(i) Section 52(6) will be amended so that, whether or not the mortgage exceeds 90% of the authority’s estimate, the authority shall, if so requested by the owner and mortgagee, make the advance payment direct to the mortgagee;

(ii) Where it is shown that the authority has delayed unreasonably in making such a payment, or that the estimate on which the payment was based was unreasonably low,[45] the County Court may, on the application of the claimant, may make such interim or final orders (including imposing time-limits), as are necessary to enforce the authority’s obligations under this proposal.

 

Consultation issue

Do consultees agree that the County Court should have jurisdiction (as proposed above) to review and enforce the performance of the authority’s duties in relation to advance payments? If not, what alternative mechanism would be appropriate?

(4) Lands Tribunal Extended jurisdiction

Overlapping claims

                8.30             We mention here a procedural issue on which reform could be useful. Rights to compensation for injurious affection (whether under section 7 or section 10 of the 1965 Act) arise only in respect of the lawful use of statutory powers. If the relevant damage results from those powers being exceeded, the proper remedy is a common law claim. However, as we have explained, the boundary is far from clear.[46] It is undesirable that the claimant should be left uncertain as to the proper forum, or that the same facts should have to be litigated separately.

Extended jurisdiction

                8.31             Since some of the members of the Lands Tribunal are also qualified to sit as judges, it may be possible to make administrative arrangements to combine a hearing before the Lands Tribunal with a hearing of the Court (under the same member/judge). We understand that this is sometimes done.

                8.32             However, we think it would be useful to clarify the position by giving the Lands Tribunal jurisdiction to deal with any claim (common law or statutory) relating to damage to land or the use of land, where it arises out of substantially the same facts as a compensation claim already before the Tribunal. Defining the cases in which this would be appropriate, and the procedure to be followed, could be left to procedural rules.

Proposal 14: Lands Tribunal jurisdiction

The Lands Tribunal shall have jurisdiction (subject to procedural rules) to determine any claim (common law or statutory) relating to damage to land or to the use of land, where it arises out of substantially the same facts as a compensation claim which has been referred to the Tribunal.

Consultation issue

Do consultees agree that the Lands Tribunal should have extended jurisdiction as proposed to deal with a common law claim arising out of the same facts as a compensation claim already before the Tribunal?

(5) Interest on compensation

Existing law

Compensation for compulsory purchase

                8.33             Where an acquiring authority takes possession of land before agreeing compensation, the compensation ultimately awarded carries interest from the date of entry until the date of payment.[47] Where the procedure is by notice to treat and notice of entry,[48] interest will run from the date on which possession is first taken of any land included in the notice of entry, even if actual possession is taken in stages.[49] Under the vesting declaration procedure, interest is payable from the date of vesting.[50]

                8.34             Where an advance payment of compensation is made, normally an amount equal to 90% of the authority’s estimate,[51] there must be a payment at the same time of the accrued interest on that amount.[52] There is also provision for interest to be paid annually on the difference between the authority’s estimate and the amount of any advances, as long as the accrued interest exceeds £1,000.[53]

Injurious affection where no land has been taken

                8.35             As explained in the previous Part, compensation for injurious affection where no land is taken may be payable, either (for the effect of the works) under section 10 of the 1965, or (for the effects of use) under Part I of the 1973 Act. In the former case, interest runs from the date of the claim.[54] Under Part I of the 1973 Act, interest runs from the date of service of the notice of claim, or (if later) the “first claim day”.[55]

Other rights to compensation

                8.36             In considering any revision of the rules relating to interest, it needs to be borne in mind that similar issues arise in relation to numerous other statutory provisions giving rights to compensation. Section 80 of the Planning and Compensation Act 1991 made comprehensive provision for interest on compensation under a number of provisions listed in Schedule 18 to the Act. These include claims, for example, under the Ancient Monuments and Archaeological Areas Act 1979, Land Drainage Act 1991, Highways Act 1980, Building Act 1984, Water Industry Act 1991, Town and Country Planning Act 1990 and the Planning (Listed Buildings and Conservation Areas) Act 1990. Depending on the nature of the right, interest may be payable from the date of the claim, the date of the loss, or some other date (as specified in the schedule).

Prescribed rate

                8.37             Under each of the statutory provisions considered above, interest is payable at “the prescribed rate”.[56] The current interest rate, as so prescribed,[57] is 0.5 per cent per annum below the “standard rate”.[58] The “standard rate” is defined in terms of the base rates quoted by “the reference banks”[59] for the day preceding entry, and each subsequent “reference day” until payment.[60] Thus, a simple rate of interest is imposed, marginally lower than the base rates of the largest banks.

Power of the Lands Tribunal to award interest

                8.38             Apart from any specific statutory provision, the Lands Tribunal can exercise the discretion conferred by section 49 of the Arbitration Act 1996, applied by rule 32 of the Lands Tribunal Rules.[61] This gives a wide discretion to award simple or compound interest from such date and at such rate as the Tribunal thinks just in the circumstances of each case. However, section 49 applies “subject to any enactment that prescribes a rate of interest.”[62] It seems clear therefore that the general power cannot be used to supplement interest payments in the cases to which the 1961 Act prescribed rate applies.[63]

                8.39             We have no evidence as to how or in what circumstances the Tribunal currently exercises the discretion, and in particular whether compound interest is ever awarded. The circumstances in which it is required to use section 49  are probably very rare, given the wide range of claims to which (since the 1991 Act) the prescribed rate applies. The Aslam case[64] provides an example of the application of the previous discretion under the Arbitration Act 1950. The case related to compensation for a discontinuance order, made before the prescribed rate was applied to such cases by section 80 of the 1991 Act. The Court of Appeal held that, in those circumstances, the Tribunal should have exercised its discretion to award interest. It directed that interest should be “at the Commercial Court rate”, which appears to imply 1% above bank rate.[65] This compares to 0.5% below bank rate, under the 1961 Act (see above). As far as appears from the published report of Aslam, there was no discussion of this apparent discrepancy.

Proposals for change

CPPRAG

                8.40             CPPRAG recommended that the basis for paying interest on the compensation payable should be reviewed, with a view to:

                                            (1)             allowing payment of compound interest and revising the threshold of £1,000 for annual payments;

                                            (2)              bringing the basis on which the rate of interest payable is prescribed more closely into line with the rates of interest which a claimant could have obtained if he had received full payment and deposited that sum in a bank or building society;

                                            (3)             providing for interest to be payable on all reasonable professional fees, including legal fees, from the date on which the relevant work  was undertaken for the claimant by the professional adviser.[66]

                8.41             They thought that the present arrangements could amount to a “penalty on the claimant for the late payment of compensation by the acquiring authority”.[67] Their “main concern” was that:

Claimants should not be compelled to accept a lower rate of interest than that which they could have obtained it they had received full payment and deposited that sum in a bank or building society.[68]

Policy Statement

                8.42             The Policy Statement appears to accept the view of CPPRAG that the current prescribed rates amount, in effect, to “a penalty on the claimant for the late payment of compensation”:

Furthermore, the evolution of statute and case law relating to interest payments in respect of other matters, - including professional fees and loans incurred to meet disturbance and other costs and losses, - has resulted in a convoluted situation which does not always provide for the claimant to be fully recompensed for his loss.[69]

                8.43             However, it was noted that the CPPRAG recommendations could involve

a significant increase in an acquiring authority’s costs, unless measures were introduced in parallel to ensure that claimants could not benefit by adopting deliberate delaying tactics to increase the amount of interest payable. A careful balance would need to be struck…[70]

                8.44             Before a final decision, it was thought advisable to await the outcome of the Law Commission’s separate project, examining the power of the courts to award compound interest.[71]

                8.45             However, there was seen to be “a more pressing need to clarify in the statute the basis on which interest should be payable on fees and taxes (including VAT)”. The Law Commission was invited to consider this as part of the present project.[72]

Comment

                8.46             As explained above, we are considering separately (not limited to land compensation) the possible extension of powers of courts and tribunals to award compound interest. CPPRAG’s views on the adequacy of the prescribed rates will be subject to further consideration by Government in the light of that review. Their concerns gain some support from a comparison of the prescribed rate with the “commercial rate”, which was thought appropriate in the Aslam case.[73] We assume that the £1,000 threshold for annual payments will be reviewed at the same time.

                8.47             A simple increase of the prescribed rate can be achieved by amended regulations under the 1961 Act, and does not require primary legislation. Any more general restructuring of the present “convoluted” arrangements will need to take account of rights to interest on the many other comparable forms of compensation, reviewed in the 1991 Act.[74]

                8.48             So far as concerns the specific issues raised in relation to interest on professional fees, and other matters, we do not at present have any detailed information as to the scale or precise nature of the problems in practice. Accordingly, our proposals for the Code at this stage simply reproduce the effect of the present legislation. However, we invite views and evidence on specific problems in relation to different categories of compensation.

Proposal 15: Interest

Interest on compensation, in respect of the compulsory purchase of any land on which entry has been made before payment of compensation, shall be paid from the date of entry at such rate as may be prescribed from time to time under 1961 Act, s 32 or any replacement.[75]

Consultation issues

Are there any particulars in relation to the award of interest which require to be addressed in the new Code, for example relating to:

                                           (1)             Professional fees (including VAT);

                                           (2)             Loans incurred to meet disturbance costs;

                                           (3)             Any other specific items of cost?

Incidental issues not in the code

(6) Tax

Introduction

                8.49             Our terms of reference do not require us in terms to address the subject of taxation. However, we mention it for the sake of completeness. There are two possible issues:

                                            (1)             Under tax law, what special rules (if any) should apply to the assessment for tax compensation for compulsory purchase?

                                            (2)             Under compensation law, if the tax assessment of the compensation leads to an increased or reduced liability to tax, as compared to the position in the absence of compulsory purchase, how, if at all, should the difference be reflected in compensation?

                8.50             The first issue, as one of tax law, would not naturally fall within the scope of a statutory compensation code. The latter is an issue of compensation law, and therefore some comment is appropriate.

Existing law

Tax rules

Income and capital taxes

                8.51             As has been explained, notwithstanding the separate heads under which it is assessed, compensation for compulsory purchase is treated as a single global figure, representing the price for acquisition of the land.[76] Until 1965, accordingly, it was treated for tax purposes as a single capital payment.[77] One consequence was that no income tax was payable, even though assessment included elements of an income nature, such as temporary loss of profits.[78] However, following the introduction of capital gains tax in 1965, special rules were introduced to enable an apportionment to be made between the capital and income elements of compensation, and for each element to be taxed appropriately.[79] 

                8.52             The modern rules are contained in the Taxation of Chargeable Gains Act 1992, sections 245 to 248.[80] Section 245 provides for the total compensation to be apportioned between capital, which is subject to capital gains tax, and income, which is taxed as a trading receipt. Thus, for example:

                                            (1)             Amounts attributable to loss on stock, temporary loss of profits, temporary loss of goodwill and expenses are treated as income, and, as such subject to income or corporation tax.[81]

                                            (2)             Compensation for permanent loss of profits and permanent loss of goodwill is a treated as a capital sum subject to capital gains tax.[82]

                                            (3)             Compensation payments in respect of injurious affection and severance to retained land[83] are treated as sums received on a part disposal of the retained land, and subject to capital gains tax.[84]

“Roll-over relief”, subject to certain exceptions, is available where the compensation is applied to the purchase of other land within a defined period.[85]

Stamp duty

                8.53             Stamp duty is also chargeable on a conveyance or transfer of sale.[86] This is also  calculated by reference to the total amount of compensation payable.  Thus it includes any sums payable for severance and injurious affection[87] as well as disturbance.[88]

                8.54             For acquisitions following a notice to treat, conveyance does not occur until compensation has been settled (by agreement or determination), even if entry has been taken at an earlier date. Stamp duty is therefore payable on the total contractual amount of the compensation on registration of the conveyance, as with voluntary property transactions.

                8.55             Where acquisition follows a general vesting declaration, stamp duty must be settled when the transfer of title is registered.  Where compensation has not yet been determined, stamp duty is payable calculated by reference to the market value prior to execution of the general vesting declaration of the estate or interest which has been so vested, even if the compensation finally may differ. The Stamp Office requires this estimate to be made by a qualified valuer and endorsed by an officer of the acquiring authority.

Compensation rules

                8.56             Compensation law has had to adjust to reflect the changes in tax law. Before the advent of the rules for apportionment between capital and income, the House of Lords held in West Suffolk CC v W Rought Ltd, [89]that the amount of the disturbance claim for temporary loss of profits had to be reduced, by an amount representing the income tax which would have been payable if they had actually been earned.

                8.57             However, in a case in 1980, under the new rules, the Court of Appeal held that no adjustment should be made.[90] The Court considered that the effect of the new rules for apportionment was:

…to free the compensation for temporary loss of profits of its capital nature and enable it to be treated for what it in truth is, namely a trading receipt.[91]

                8.58             Rought’s case was distinguished on the basis that there had been a clear statement by the Revenue that, under the then rules, no tax was payable on the temporary disturbance element. The new rules, by contrast, were designed to enable an apportionment to be made for tax purposes, between the capital and income elements. In the absence of a clear statement by the Revenue, any attempt to anticipate the amount of the tax, by some form of adjustment, risked causing injustice. Accordingly, the compensation should be paid in full, and the claimant left to account for such amount as might subsequently be found due by way of tax.[92]

                8.59             In two more recent cases, the Lands Tribunal was faced with the opposite issue: whether compensation should be increased to reflect a liability for tax which would, or might, not have arisen in the absence of compulsory purchase:-

                                            (1)             In Alfred Golightly Ltd v Durham CC (1980),[93] the acquisition was of a former colliery site, and part of the compensation was attributable to value of the minerals recoverable from the spoil heaps. At that time, development land tax was payable on that element of value, and had to be deducted from the compensation.[94] If the minerals had been worked, the amount realised would have been exempt from development land tax.[95] The Tribunal held that an additional amount should be paid to compensate for the additional tax so payable.[96]

                                            (2)             In Harris v Welsh Development Agency,[97] the acquisition was of a business property. Although the claimant relocated the business, he incurred a substantial liability to capital gains tax on the disposal to the acquiring authority, and sought to make it good as an additional item of compensation under Rule (6). The Tribunal rejected the claim holding (a) that rule 5(6) had no application, because the Capital Gains Tax liability was a matter “directly based on the value of land”; (b) that there was no sufficient causal link, and the loss was too remote.[98] The Tribunal distinguished Golightly, noting the concessions made in that case,[99] and the factual differences:

[In Golightly] the county council were required to deduct the whole of the DLT and the claimant was required to suffer tax that, in the absence of the acquisition, it would not have incurred. In this current reference, however, the effect of the forced sale was not to remove an exemption to tax, but to turn into an actual liability what already existed as a contingent liability. The effect of the sale was to bring forward an existing future liability.[100]

                8.60             The view, expressed in Harris, that increased liability was outside rule (6) as a matter based “directly on the value of land” seems questionable. In the context of section 5 of the 1961 Act, the word “direct” seems to be referring to the direct application of compensation rules (as in rule (2)); here the direct cause was the tax statute.[101] On the factual grounds, however, the decision can be supported, and is distinguishable from Golightly, where there was a clear loss of a specific tax exemption. In this respect it is also consistent with the earlier cases on reduced tax liability, under which potential tax liability was relevant only where the nature and extent of the reduction were unambiguously established.

                8.61             In summary, it seems that, where the tax position is clear, and the Tribunal can identify a specific increase or reduction in tax liability resulting from the compulsory purchase, compensation will be adjusted accordingly. Otherwise, compensation will be assessed without reference to potential tax liability, which will be a matter to be resolved with the Revenue in due course.

Policy Statement

Policy issues

                8.62             CPPRAG drew attention to certain perceived problems in relation to tax:

                                            (1)             The timing of compulsory purchase orders and long delays in settling compensation claims might have an adverse effect on a claimant’s tax liability;

                                            (2)             The present rules, under which compensation sums are treated as either sums representing income or sums representing capital, and taxed accordingly, might mean that income that would be received over a number of tax years is treated as received in the year, and therefore taxed at a higher rate than would otherwise have been the case.[102]

                                            (3)             In the case of the receipt of capital gains, the availability of rollover relief may be prejudiced. In view of the delay in settling compensation claims, consideration should begin to fixing liability to capital gains tax by reference to an earlier date than that on which the landowner is held to have disposed of his interest in the property.

They recommended that the Inland Revenue be invited to reconsider their practice in relation to compulsory purchase compensation.[103] No special problems were mentioned in respect of stamp duty.

                8.63             The Policy Statement did not accept that any change was needed:

Having reviewed the impact of current taxation rules on those from whom land is being acquired, as recommended by CPPRAG, we have come to the conclusion that no changes are required to the tax laws.  However, in line with current case law, 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.[104]

                8.64             In the Appendix, it was made clear that this would be achieved by “advice” to make clear that compensation under rule (6) “is intended to include any additional tax incurred as a direct result of the compulsory acquisition of a claimant’s land.”[105] We assume that such advice would be agreed with the Inland Revenue.

Consultation issues

                                           (1)             Do consultees agree that (as proposed by the Policy Statement) additional tax liabilities arising out of the compulsory purchase can be satisfactorily met by the law of disturbance, supplemented by advice agreed with the Revenue.

                                           (2)             If not, what provision should be made in the Code for such tax liabilities?

                                           (3)             Are there any other tax issues arising out of the law of compensation which should be addressed in the new Code?

                                           (4)             We would welcome specific examples of any problems experienced in practice.

(7) Subsequent planning permissions

Existing law

                8.65             Part IV of the 1961 Act contains a complex set of provisions dealing with compensation where planning permission for additional development is granted after compulsory acquisition. The provisions were first enacted in the 1959 Act (section 18), recast in the 1961 Act,  repealed by the Land Commission Act 1967, and were then re-enacted with modifications by the Planning and Compensation Act 1991.[106] The following is only a short summary of the main points.

                8.66             Section 23 applies where an interest was acquired (either compulsorily or sold voluntarily to an authority having CPO powers) and within 10 years of the “date of completion”[107] a planning decision is made granting consent for “additional development” on the subject land.[108] If the compensation or consideration was less than the amount which the interest would now command, the person to whom compensation or the purchase price was payable is entitled to claim the difference.

                8.67             The additional compensation is an amount equal to the difference between the “principal amount of compensation”[109] actually paid, and that which would have been payable in pursuance of a notice to treat served on the relevant date,[110] if the new planning decision had been made before that date; and the permission granted by it had been in force on that date.[111] The ordinary procedures relating to determination of questions of disputed compensation (under Part I) apply.[112]

The CPPRAG Review

                8.68             The CPPRAG Review indicates that the Advisory Group:

[H]eard nothing to suggest that this provision has given rise to any particular difficulties, anomalies or unfairness, and it does not seem unreasonable for the original landowner to benefit from any change in the purpose for which his land had been taken.

                8.69             However, the Group mentioned (but appeared to form no conclusion or suggestion) that a policy decision was needed on former landowners having the benefit of permissions resulting from the acquiring authority’s intervention. The Group felt, in any event, that the “cut-off date of 10 years needed further thought”, although it did not indicate whether adjustment should be up or down.[113]

Policy Statement

                8.70             The DTLR Policy Statement is silent on this issue.

Discussion

                8.71             This complicated set of provisions has a curious history. Having been repealed in 1967, it was revived as part of a set of piecemeal reforms in 1991. The main change was the extension of the qualifying period from 5 to 10 years.[114] Thus, a relatively recent policy decision has been made by Parliament to reintroduce this extended right after a lapse of nearly a quarter of a century. That in itself was an unusual step for the legislature to take. Further, as CPPRAG observe, there appears to be no evidence of concern by public or practitioners relating to the mechanism. CPPRAG accordingly recommended its retention.

                8.72             On the other hand, we find this right to additional compensation somewhat anomalous. Compensation under the ordinary rules is intended to reflect the full market value of the land at the valuation date, with all its present and future potential, including any hope value for future development. The claimant is then free to use the money for alternative investments (any delay in payment being compensated by interest). There is no obvious reason why he should be treated as though he had retained his investment in the acquired land, until any potential value had become a certainty. No such expectation would arise on an ordinary sale in the private market, in the absence of a specific provision in the contract of sale for “clawback” of future development value.

                8.73             There is a further possible anomaly, not expressly remarked upon by CPPRAG. CPPRAG suggested elsewhere that there should be no automatic right to an assumed permission for the development to be carried out by the acquiring authority, unless it would have been available in the no-scheme world.[115] However, there is no similar qualification to the right to compensation for subsequent permissions. The former owner gains the benefit of the new permission, whether or not it would have been granted apart from the authority’s scheme. CPPRAG thought it “not unreasonable” that the owner should benefit from any change in the purpose for which his land is acquired. But if he is not entitled to benefit from the original purpose, it is hard to see why his position should be better if the purpose is changed.

                8.74             As a matter of detail, it is to be noted that this provision was drafted before the West Midlands Baptist case (1969) established that values should taken at the date of entry or determination of compensation (“the valuation date”), rather than the date of notice to treat.[116] The 1991 re-enactment made no change in this respect. Thus it retains, for example, references to a hypothetical planning decision immediately before the date of notice to treat. The more appropriate time for judging the position, arguably, would be the valuation date. If the provision is to be retained in any form, the precise drafting will need to be reviewed to remedy such detailed points.[117]

                8.75             For the above reasons, we make no proposal to reproduce these provisions in the new Code. However, we invite views on whether the rule should be retained, and if so in what form; we would particularly welcome evidence (with examples) of how much it is used in practice and with what financial consequences.

Proposal 16: Subsequent planning permissions

1961 Act, s 23 (compensation where permission for additional development is granted after acquisition) will be repealed.

Consultation issues

Views are invited on the following:

                                           (1)             Do consultees agree that provisions for compensation for subsequent permissions (1961 Act, Part IV) should be repealed without replacement?

                                           (2)             If not, what changes should be made to the detailed rules; in particular:

                                                                   (a)              Should the claim be limited to any new permissions which are not dependent on the scheme for which the authority originally acquired the land?

                                                                   (b)              Should the present period of 10 years be changed? If so, to what period, and why?

                                                                   (c)              Are any other changes needed (for example, to relate the provisions to the “valuation date” as established by case-law since the 1961 Act)?

                                           (3)             To what extent are these provisions used in practice? (We would welcome examples of individual cases, and any statistical information about the number of cases in which section 23 has been invoked, and with what financial consequences.)

(8) Additional loss payments

Existing law

                8.76             The 1973 Act, in sections 29ff, provides for home loss payments to be payable to those displaced from dwellings by compulsory purchase, or other public projects,[118] if they have been in occupation by virtue of a qualifying interest or right for at least one year. The amount of the payment for an “owner’s interest”[119] is 10% of the market value, up to a maximum of £15,000; and in other cases £1,500.[120]

                8.77             Sections 34ff give a right to farm loss payments for owners or tenants displaced from agricultural land of more than 0.5ha. The amount is a payment “equal to the average annual profit derived from the use for agricultural purposes of the agricultural land” computed by reference to the profits for the three years before displacement.[121]

Policy Statement

                8.78             The Government accepted the CPPRAG recommendation that all those who have land compulsorily taken from them should receive a payment in recognition of that fact:

While we reject the concept of a premium payable on top of open market value as an element in the valuation of the land being acquired, we do consider it right that those who have had their property taken from them should receive an additional “loss payment” in recognition of the physical and psychological upheaval which that causes.[122]

                8.79             The new scheme would be in substitution for the existing home-loss and farm-loss payments. The details of the “loss-payment” scheme would be defined in secondary legislation, subject to consultation:

However, our current thinking is that the percentage payable would be linked to the current home-loss payment regime which, within the specified thresholds, is 10% of open market value. The new payment regime would include provisions for residential tenants and specific provisions to take account of the fact that small businesses tend not to hold the freehold of their sites.[123]

                8.80             Since these proposals are currently being developed by the DTLR, we have not at this stage included them in our own proposals for the draft Code. We would expect appropriate provision to be incorporated in due course.

(9) Disturbance payments

                8.81             Section 37 of the 1973 Act confers rights to “disturbance payments” in certain circumstances on a lawful occupier, who is displaced as a result (inter alia) of acquisition of land by an authority possessing compulsory powers, and who has no compensatable interest in the land.[124] The amount of the disturbance payment is defined by the Act,[125] and is broadly equivalent to the amount which would have been paid for disturbance under the compulsory purchase code.[126]

                8.82             Neither CPPRAG nor the Policy Statement mentioned any need for reform of these provisions. They apply not only on compulsory purchase, but also on purchase by agreement by a public authority, and in other cases, such as dispossession in consequence of a housing order.[127] In these circumstances, they do not naturally form part of the basic compensation Code, and there seems no reason to propose their inclusion in the present project.

(10) Minor tenancies

Existing law

Notice to treat

                8.83             Section 20 of the 1965 Act embodies a special procedure for dealing with an occupant of the land “having no greater interest than as tenant for a year or from year to year”.[128] Such a person is not entitled to notice to treat. The authority may simply await the expiry of the contractual term, or serve notice to quit under the contract.[129] In that case, there is no right to compensation under the 1965 Act, although there may be a right to a “disturbance payment” under the 1973 Act.[130] Section 20 enables possession to be required in advance of the contractual date, by means of a specific demand by the authority and the payment or tender of compensation.[131]

                8.84             The Act defines the heads of compensation to which a tenant is entitled in such cases -

                                            (1)             the value of the unexpired term or interest in the land;

                                            (2)             “any just allowance which ought to be made to him by an incoming tenant”;

                                            (3)             “any loss or injury he may sustain”;[132] and

                                            (4)             if part only of the holding is taken, compensation for severance or injurious affection.[133]

                8.85             As originally enacted, the section required to be left out of account any right of a business tenant to a new tenancy under the Landlord and Tenant Act 1954.[134] This was amended in 1973, so that now the rights of both business and agricultural tenancies to statutory protection have to be taken into account.[135]

Vesting declaration

                8.86             The vesting declaration procedure also has special rules for land subject to a “minor tenancy”[136] or “a long tenancy which is about to expire”.[137] In respect of such interests, the vesting declaration does not give the authority a  right to immediate possession.[138] Instead, section 9 provides:

(2) The right of entry conferred by section 8(1) above shall not be exercisable in respect of that land unless, after serving a notice to treat in respect of that tenancy, the acquiring authority have served on every occupier of any of the land in which the tenancy subsists a notice stating that, at the end of such period as is specified in the notice (not being less than 14 days) from the date on which the notice is served, they intend to enter upon and take possession of such land as is specified in the notice, and that period has expired.

(3) The vesting of the land in the acquiring authority shall be subject to the tenancy until the period specified in a notice under subsection (2) above expires, or the tenancy comes to an end, whichever first occurs.

                8.87             There are no special rules for compensation.

Discussion

                8.88             We have seen no suggestion that the substance of these arrangements for minor interests should be altered materially. Their advantage is that the acquiring authority does not have to trouble at the outset with lesser interests, which may expire before possession is required, or, if not, may be better dealt with by informal arrangements for relocation. The authority is thus free to handle those issues as and when it becomes necessary to do so. The vesting declaration procedures also give discretion to define the remaining length of expiring tenancies, which are to be excluded.

                8.89             The heads of compensation in the 1965 Act are expressed in terms dating from the 1845 Act, and could usefully be updated. However, they do not appear to differ substantially from the ordinary principles of compensation.

                8.90             Thus no major issue of principle appears to arise. However, it is desirable not only to modernise the language of the 1965 Act, but probably also to amalgamate the relevant parts of the two procedures into a single set of provisions. We consider that this will best be done as part of our forthcoming review of Implementation, when we will be seeking to rationalise generally the procedures for notices to treat and vesting declarations.