The Law Commission

PART X

INCIDENTAL MATTERS

Advance payments

Introduction

10.1      Before 1973 a dispossessed owner had no right to any payment from the authority until the amount of compensation was agreed or determined, even though possession might have been taken long before. The potential hardship to claimants was recognised by Parliament in the 1973 Act. It gives the dispossessed owner a right to an advance payment from the authority on account of compensation, pending final agreement or determination.^[1] The amount of the advance payment is 90% of the authority's estimate (unless an amount has been agreed between the parties). If, when compensation is determined, the advance payment is too high, the excess must be repaid.^[2]
10.2      We did not see any need for substantial modification of this provision, which is relatively modern and well-understood.^[3] However, we mentioned two points of concern: first, the removal or modification of the right where the property is subject to an outstanding mortgage;^[4] and, secondly, the lack of any specific procedure for enforcement. The first has been addressed in the current Planning and Compensation Bill, and accordingly requires no further consideration in this report.
10.3      With regard to enforcement, the main concern was the lack of an effective remedy if the authority either fails to make an estimate, or makes one which is unreasonably low.^[5] We noted that the Government had not accepted CPPRAG's suggestion that the Lands Tribunal should have power to determine the advance payment; this was not thought to involve a "sensible use of the Lands Tribunal's resources", since it might be deciding "the same issues twice-over".^[6] While it would be possible for a claimant to make an application for judicial review in the High Court, we commented:

… 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.^[7]

10.4      We proposed that the County Court should be give a limited statutory power of enforcement:

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]

Consultation

10.5      There was a wide measure of support for this proposal, as offering an accessible, speedy and cost-effective alternative to judicial review.^[9] One respondent emphasised the importance of full information, and proposed that the court should have power to order either party to provide relevant information. We agree with that suggestion. Some suggested that, since the authority' failure to make an advance payment would be likely to add to the interest costs incurred by the claimant, a possible sanction would be through the Tribunal's power to award interest. We shall consider that point when we deal with the question of interest.^[10]
10.6      Concern was expressed by one respondent that the issues might involve complex questions, which would be unsuitable for the County Court.^[11] That concern seems to us to be based on a misunderstanding of the limited role we proposed for the County Court. An application would only be made where a claimant has a right to an advance payment, but the authority has failed to make an estimate in the time required by the Act, or made one which the claimant can show is manifestly too low. The court would not be required to decide detailed issues of quantification,^[12] but would simply ensure that the authority complies with its statutory duty. The advantages of using the County Court are that it is relatively accessible and cost-effective; and that it is well-adapted to give the necessary directions and orders (interim and final) to secure effective enforcement.
10.7      Some thought that we should reconsider the possibility of giving the Lands Tribunal an extended role in relation to advance payments. We accept that a possible alternative would be a procedure using the Lands Tribunal, although this would have a different purpose. The Tribunal, unlike the County Court, would be empowered to substitute its own view of the appropriate estimate of compensation, for the purpose of section 52, in cases where either the authority had failed to make an estimate, or where the claimant considered its estimate too low. The authority would then be under the same statutory obligation to make an advance payment (90% of the estimate), as it would have been in respect of its own estimate.^[13] We do not see that this should impose an undue burden on the Tribunal, as the Government's original response to CPPRAG suggested. The Tribunal should be well able to develop a summary procedure, possibly on the basis of written submissions without the need for a hearing, which would enable it to make a reliable estimate. Indeed, such an interim estimate may save costs and time, by assisting the parties to a final settlement.^[14] It would need to be made clear that such an interim estimate would not prejudge the Tribunal's determination in the event of a reference, and could not be relied on as a comparable in other cases.
10.8      We recommend that these issues be given further consideration by the relevant Departments in connection with their consideration of the Commission's report on land and valuation tribunals.^[15]
10.9      Subject to that review, we confirm our proposal for a new procedure in the County Court, and recommend:

Rule 19 Advance payment

(1) Where the authority takes possession of the land before compensation has been paid, the claimant shall be entitled to an advance payment, in accordance with sections 52 and 52A of the 1973 Act.

(2) 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, the County Court may, on the application of the claimant, make such interim or final orders (including orders for disclosure of information, and for imposing time-limits), as are necessary to enforce the authority's obligations under this rule.

Lands tribunal jurisdiction

10.10      There was almost universal support for our proposal that the Lands Tribunal should have extended jurisdiction to deal with common law claims arising out of the same facts as a claim for compensation.^[16] This was intended to address the possible overlap between claims for compensation, arising out of the lawful use of statutory powers, and related common law claims arising out of negligence or illegality in the exercise of those powers.^[17] As we have explained, the boundary is far from clear,^[18] and we considered it undesirable that the claimant should be left uncertain as to the proper forum, or that the same facts should have to be litigated separately.^[19] The proposal was limited to claims relating to "damage to land or to the use of land", since these are likely to raise issues similar to those raised by the compensation claim.^[20]
10.11      We accordingly recommend:

Rule 20 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.

Interest

Existing law

Date from which interest runs

10.12      Where an acquiring authority takes possession of land before agreeing compensation, there is a statutory right to interest on the compensation ultimately awarded from the date of entry until the date of payment.^[21] Under the vesting declaration procedure, interest is payable from the date of vesting.^[22]
10.13      It might be expected that a distinction would be made for this purpose between the different heads of compensation. For items whose value is fixed by reference to the date of possession, it is logical to take that date for the running of interest. Those items include not only the value of the subject land, but also other heads, such as diminution in value of the retained land, and the value of a business on a total extinguishment claim. It seems less logical to take that date for other heads of loss, such as loss of profits or relocation costs. However, the rule arises from the fact that, although divided into separate heads for the purposes of assessment, compensation under the present law is treated as a single, global figure, representing the "value to the owner" of the land at the valuation date.^[23] This principle applies, even though some elements of the global figure will represent expenditure or losses incurred at different times, whether before or after the valuation date.
10.14      The same rule as to the running of interest applies on a claim for equivalent reinstatement, as the following example shows:

Example The claimant owned two churches that were located within a slum clearance site. Entry was effected in 1974, but works to provide a single replacement church did not commence until 1980. The new church was occupied in 1982. The council made staged compensation payments between 1980 and 1986. The amount of compensation was agreed in November 1985. The parties could not agree what further sum should constitute the interest. The Court of Appeal upheld the Tribunal's decision that interest ran from the date of entry in 1974 until the time compensation was paid. The Court observed that the mission did not receive any windfall, since during the period of dispossession (from 1974 to 1982) it had neither the land nor its value. 1 Halstead v Manchester City Council [1998] 1 EGLR 1, CA. The Australian Federal Court reached a similar conclusion under LAA (Cth) s 58(2): Hubertus Rifle Club v Commonwealth (1995) 130 ALR 447.

Amount of interest

10.15      nterest on compensation for compulsory purchase is simple interest, at the rate prescribed under section 32 of the 1961 Act. In the Consultation Paper we summarised the current rule:

The current interest rate, as so prescribed,^[24] is 0.5 per cent per annum below the "standard rate".^[25] The "standard rate" is defined in terms of the base rates quoted by "the reference banks"^[26] for the day preceding entry, and each subsequent "reference day" until payment.^[27] Thus, a simple rate of interest is imposed, marginally lower than the base rates of the largest banks.^[28]

We drew attention to the fact that the same prescribed rate is used in a number of other statutory provisions giving rights to compensation.^[29] We contrasted this rate with the higher "commercial court rate" (normally 1% above bank rate^[30]), which was applied by the Court of Appeal in a case relating to land compensation not covered by the standard rate.^[31]

Commentary in the Consultation Paper

10.16      In the Consultation Paper we made no proposal to change the rule as to the date from which interest runs. We accepted that it was not wholly logical in relation to elements which were not fixed by reference to the date of possession. Furthermore we noted the apparent lack of a consistent practice as to the date by reference to which elements other than the value of land were assessed:

Typical is compensation for disturbance, which may represent loss of profits, from the first threat of compulsory purchase until the date of effective re-establishment on a new site. The former may be some years before the valuation date, the latter some years afterwards.^[32] Similarly, removal expenses, and other allowable heads of the disturbance claim, may be incurred at different times. In theory, one would expect there to be some established mechanism to enable all such items to be adjusted (upwards or downwards)^[33] to represent the equivalent sums at the common valuation date. However, there appears to be no clear guidance in the cases, nor any consistent practice among valuers.^[34]

10.17      We commented, however, that we had seen no evidence that this theoretical problem caused difficulties in practice:

Our review of the cases and our discussions with valuers indicate that it is unusual for any specific steps to be taken to adjust figures to a common date.^[35] Market value of the subject land is assessed at the valuation date, and the other heads are assessed as they arise. Interest is payable on the global sum as from the date of entry. Any theoretical inconsistencies can be seen as part of the "swings and roundabouts" in what is inherently an imprecise exercise.^[36]

10.18      Accordingly, we saw no need for the Code to lay down detailed rules governing the individual heads of claim:

The valuer will be required to have regard to those detailed rules in arriving at a global figure of "fair compensation". It will be a matter for valuation expertise as to how best to achieve that on the facts of any individual case.^[37]

10.19      We noted that CPRRAG had criticised certain aspects of the present rules. They had proposed allowing for the payment of compound interest; bringing the prescribed rate more closely in line with rates which a claimant could have obtained from a deposit in a bank or building society; and providing specifically for interest to be payable on all reasonable professional fees. In its response, the Government had proposed that further consideration of rates of interest should await the Government's consideration of the Commission's recommendations on compound interest. However, it asked the Commission to give separate consideration to the issue of interest on fees and VAT. ^[38]

Consultation

Date from which interest runs

10.20      Most respondents supported the view that interest should run on the total amount of compensation from a single date. This was principally on the grounds of convenience and simplicity. There was also general agreement that, as now, the starting date should be the date when the interest vests in the authority, or, if earlier, the date of possession. However, a minority noted the potential unfairness of applying this rule inflexibly to heads of compensation, such as disturbance or equivalent reinstatement, where the costs or losses may be incurred significantly before or after that date.
10.21      We think it possible for the rule to cater for both points of view. In so far as the compensation is based on the value of land at the valuation date, there is no reason to depart from the present rule. In other cases, even though logic may suggest a different date, there may often be practical merit, and no significant unfairness to either party, in applying the same rule. However, we think that there should be provision for a different date to be taken, either by agreement or in the discretion of the Tribunal, having regard to the date when the loss or expense was incurred. The appropriateness of such an exception will depend on the facts of the particular case, including the valuation methods used. It will be for the Tribunal, in the absence of agreement, to ensure the overall result is fair to both parties.

Amount of interest

10.22      We did not raise any specific questions on the adequacy of existing interest rates, or whether there should be power to award compound interest. As noted above, the Government's response to CPPRAG proposed that this subject should be further reviewed in the light of the Law Commission's separate project, examining the power of the courts to award compound interest. A consultation paper on that subject has since been published, and the responses are currently under consideration.^[39]
10.23      There seems to be general agreement that it is desirable to have a prescribed rate of interest, for the sake of certainty. However, if so, the selection of the rate will inevitably involve an element of "rough justice". In practice, rates will differ according to whether it is assumed that the claimant is a borrower (for example, borrowing to finance relocation) or a lender (depositing the compensation in a bank or building society); and according to the circumstances and the status of the borrower.^[40] It is unnecessary, for the purpose of the present report, to reach a conclusion on how to resolve these differences. The statutory Code will simply provide for the rate to be "prescribed".
10.24      If and when a policy decision is made to introduce compound interest more generally, specific statutory provision will be needed to apply it in the context of compensation for compulsory purchase. In our Compound Interest Consultation Paper we commented that if it was decided "to extend the power to award compound interest to courts generally, there seems no reason in principle why the same should not apply to compensation awarded by the Lands Tribunal".^[41] Responses to that paper indicate that it is not necessarily appropriate for interest to be at a compound rate irrespective of the size of the award, or of the length of time that it is outstanding. However, that issue will have to await further consideration in the light of our final report on that subject and detailed information on the actual impact a change to a compound rate would have on compensation claims for compulsory acquisition.

Finance costs

10.25      One further point is relevant to this aspect of the Code. A number of respondents commented on the need for the claimant to be adequately compensated for interest costs reasonably incurred as a result of the acquisition. If there is significant delay in the payment of compensation, or if the authority fails to make an adequate advance payment, the claimant may be forced to borrow at relatively high rates of interest. It is difficult in this respect to draw a clear line between payment for consequential loss (Rule 5) and the award of interest on compensation. However interest payable on the whole award of compensation is a separate issue from finance costs, which can be consequential losses. Interest accrued on a loan may be a "cost", distinct from interest on the award of compensation.^[42] If interest charges are incurred by the claimant in financing the development of new premises, then these will usually be treated as part of the purchase price of the premises and therefore, subject to a rebuttable presumption that the new premises provide value for money.^[43]
10.26      Where finance costs have been aggravated by the conduct of the authority in connection with the compensation procedure, we think it would be a useful sanction for the Tribunal to have power to reflect that extra cost in a higher rate of interest. There would be a corresponding power to reduce interest in the case of unreasonable conduct by the claimant. We have amended our proposal accordingly.

Professional fees

10.27      We asked for information as to particular problems arising out of the award of interest on professional fees, including VAT. The general view, with which we agree, is that professional fees reasonably incurred in dealing with the consequences of compulsory acquisition should normally be recoverable as compensation for consequential loss, and interest payable accordingly. The main anomaly is that, under the present rules, interest is payable from the date of possession, regardless of when the fees are paid. However, our amended proposal in that respect gives the Tribunal the necessary flexibility to fix an appropriate date having regard to the date when the expense is incurred.^[44]
10.28      We accordingly recommend:

Rule 21 Interest

The following rules shall apply in relation to interest on compensation:

(1) Subject to (2) and (3), interest shall be paid from the date when the subject land vested in the authority, or if earlier, the date when the authority took possession of the land, at such rate as may be prescribed from time to time by the Secretary of State;

(2) Save in respect of compensation heads A and B, the Tribunal may, if it thinks appropriate having regard to the nature and amount of the award, determine that interest on different items of loss or expense shall run from some other date or dates, having regard to the time when the relevant loss or expense has been or is expected to be incurred;

(3) The Tribunal may increase or decrease the rate of interest, where it considers it appropriate to do so, having regard to any unreasonable conduct of either party in relation to the compensation claim (including unreasonable delay by the authority in making an advance payment).

Note 1    1973 Act, s 52.    [Back]

Note 2    Ibid, s 52(5).    [Back]

Note 3    See CP 165, paras 8.21ff.    [Back]

Note 4    By 1973 Act, s 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.    [Back]

Note 5    If the authority has made an estimate, but is simply delaying payment, it seems that an ordinary action could be used to enforce payment: cf Trustees of Dennis Rye Ltd v Sheffield City Council [1998] 1 WLR 840 (action to enforce duty to pay improvement grant).    [Back]

Note 6    CP 165, para 8.24.    [Back]

Note 7    CP 165, paras 8.28 – 8.29.     [Back]

Note 8    CP 165, para 8.28. We noted that the County Court already exercises forms of judicial review jurisdiction in other areas: eg Housing Act 1996, s 204 (review of decisions relating to accommodation for the homeless).    [Back]

Note 9    Reference was made to the County Court’s existing experience of property and valuation matters, particularly in the context of Part II of the Landlord and Tenant Act 1954.    [Back]

Note 10    Paras 10.25 – 10.26 below.    [Back]

Note 11    This comment came from the respondent for the LCD (the Department responsible for the County Court) which mentioned problems such as mortgage arrears, group litigation, human rights issues etc.    [Back]

Note 12    As we noted, the County Court may in any event be faced with issues relating to compulsory purchase and compensation under its separate jurisdiction under the Human Rights Act 1998: CP 165, para 8.29.    [Back]

Note 13    The amount of the due payment having been fixed, it could be enforced if necessary by judicial review or by ordinary court action: see n 5 above (referring to the Dennis Rye case).     [Back]

Note 14    A further possibility might be a role for the Property and Valuation Tribunal under the new arrangements proposed by the Commission in its recent report on the land valuation tribunals: Land, Valuation and Housing Tribunals: The Future (2003) Law Com No 281, Part VI.    [Back]

Note 15    Land, Valuation and Housing Tribunals: The Future (2003) Law Com No 281.    [Back]

Note 16    The only dissentient was concerned at possible expense and inflexibility of Lands Tribunal procedures. This concern does not accord with other evidence. However, the general arrangements in land and valuation tribunals are subject of separate study in our report Land, Valuation and Housing Tribunals: The Future (2003) Law Com No 281.    [Back]

Note 17    CP 165, para 8.30.    [Back]

Note 18    See CP 165, para 9.16 (referring to Colac (President etc, of) v Summerfield [1893] AC 187 PC).    [Back]

Note 19    This proposal would also meet the concern of one respondent that claims for compensation may be resisted where the damage results from the negligence of a contractor: see para 3.33 above.    [Back]

Note 20    We agree with the comment of one respondent that the jurisdiction should not cover other related claims, such as for personal injury or vehicle damage.    [Back]

Note 21    1965 Act, s 11(1). See CP 165, paras 8.33ff. There is provision for the interest to be adjusted to take account of any advance payment: ibid para 8.34. Interest on “disturbance payments” under s 37 of the 1973 Act (see CP 165, para 8.81) runs from the date of “displacement”:ibid, s 37(6).    [Back]

Note 22    Vesting Declarations Act, s 10.    [Back]

Note 23    See para 2.13 above; CP 165, para 3.4.    [Back]

Note 24    Acquisition of Land (Rate of Interest after Entry) Regulations 1995, SI 1995, No 2262 (as amended by SI 1998, No 1129).    [Back]

Note 25    Ibid, reg 2. The “standard rate” is: (a) the base rate quoted by reference banks and effective on the reference day most recently preceding the day on which the entry onto the land has been made or, where that day is a reference day, such reference day; and (b) the base rate quoted by reference banks and effective on each subsequent reference day preceding payment of compensation.    [Back]

Note 26    Ie the seven largest institutions, as defined by, ibid, reg 2(5); where different rates are quoted by different banks, the fourth highest is taken:ibid, reg 2(3).    [Back]

Note 27    Ibid reg 2(2). The “reference days” are the last days of March, June, September, and December. If any of these days is not a business day, the next business day: reg 2(7).    [Back]

Note 28    CP 165, para 8.37.    [Back]

Note 29    CP 165, para 8.36, referring to Planning and Compensation Act 1991, s 80, Sched 18. The same schedule prescribes the date from which interest is to run (date of claim, date of loss etc).    [Back]

Note 30    See Dubai Aluminium Co Ltd v Salaam [1999] 1 Lloyd’s Rep 415, 465, per Rix J.    [Back]

Note 31    CP 165, paras 8.39, 8.46, referring to Aslam v South Bedfordshire DC [2001] RVR 65.    [Back]

Note 32    See eg Shun Fung where the Privy Council upheld a claim for loss of profits, dating from five years before the valuation date; the relocation claim, as upheld by the Hong Kong Court of Appeal, assumed effective relocation thirteen years after the valuation date.     [Back]

Note 33    We noted that in the Shun Fung case [1995] 2 AC 111, 123, the figures for future profits were “discounted back” to the valuation date, and future costs of relocation were “adjusted for inflation” (123D–G) (and, we understood, that the figures for past losses correspondingly adjusted forward): CP 165, para 5.83.    [Back]

Note 34    CP 165, paras 5.82 – 5.83. We referred to the West Midland Baptist case in which, Lord Reid referred to the “accepted practice” of taking “the actual costs or losses following on actual dispossession”: [1970] AC 874, 896H.    [Back]

Note 35    Shun Fung (see n 33 above) was probably exceptional, both in the amounts involved and the length of time over which they had to be assessed.    [Back]

Note 36    CP 165, para 5.87.    [Back]

Note 37    CP 165, para 5.88.    [Back]

Note 38    CP 165, paras 8.40 – 8.45.    [Back]

Note 39    See Compound Interest (2002) Law Commission Consultation Paper No 167. The final report is expected to be published in early 2004.    [Back]

Note 40    Our consultation paper on Compound Interest (see n 39 above) gave examples of rates used in cases or statute, ranging from 1% to 10% above base. At common law there can be interest, simple or compound, on a debt, but only if the contract under which the debt arises, or the usage of the trade, so provides: London, Chatham and Dover Ry Co, v South Eastern Ry Co [1893] AC 429. Interest can also be awarded as special damages: Wadsworth v Lydall [1981] 1 WLR 598.    [Back]

Note 41    Compound Interest (2002) Law Commission Consultation Paper No 167, para 4.58.    [Back]

Note 42    Cole v Southwark London Borough Council [1979] 2 EGLR 162. In this case interest on a bank loan was allowed (partially). The Lands Tribunal held that the bank loan was a reasonable and necessary consequence of the dispossession. However, part of the interest claim was avoidable because the property could have been made ready earlier.    [Back]

Note 43    Service Welding Ltd v Tyne & Wear County Council (1979) 38 P&CR 352.    [Back]

Note 44    Although we asked about the treatment of VAT, we do not think that this raises a separate issue requiring to be addressed in the Code. If VAT on the fees is recoverable by the claimant, then no question of interest should arise. (The period between payment and recovery is simply an ordinary incident of the VAT system.) If, however, VAT on the fees is not recoverable by the claimant, then we would expect it to be treated as part of the claim for consequential loss, and interest to be payable accordingly.     [Back]