The Law Commission

PART II

RIGHT TO COMPENSATION

The right to compensation

Introduction

Extent of the right

2.1      The starting point for the Code should be a simple statement of the right to compensation as defined by the Code.^[1] This will cover compensation for compulsory purchase of interests in land (including rights over land). Account also needs to be taken of cases where the right to compensation is not dependent on compulsory purchase of any interest or right, as such. Those considered in this report are:

(1) Interference with existing easements and other rights over land;

(2) Depreciation where no land is taken.

We think that the former should be covered by our proposed Code, since, although the authority acquires no interest, the effect on owners is similar, since they are compulsorily deprived of the full enjoyment of their existing rights over land.^[2] On the other hand, separate provision should, in our view, be made for depreciation where no land is taken, by amendment to Part I of the 1973 Act.

Date for identification of interests

2.2      In CP 165, we proposed that the right to compensation for compulsory purchase should apply to any person –

(1) from whom an interest, in existence at the date of notice to treat, is acquired by compulsory purchase… (emphasis added)

2.3      The reference to the interest being "in existence at the date of notice to treat" was intended to give effect to the traditional rule that interests are "fixed" at the date of notice to treat.^[3] We now consider that we should aim, throughout the Code, to adopt the "valuation date", as defined, as the base date for all purposes, save where expressly provided otherwise.^[4] Adopting that approach, we propose to redefine the relevant interests for the purpose of this rule as those in existence on the valuation date, subject to any other provisions of the Code.
2.4      This change makes it necessary to consider cases where the compulsory purchase order itself may result in the termination of an interest, for example by providing grounds for a notice to quit. The best known example was the Rugby Water Board case:^[5]

The case concerned the compulsory acquisition of two farms held under agricultural tenancies. Under the Agricultural Holdings Act^[6] and the relevant tenancies, the landlords could serve a notice to quit where land was required for another use for which permission had been granted. The issue was whether, following compulsory purchase for a permitted reservoir, the respective interests of landlord and tenant should be valued as though such a notice could be served; or whether that possibility should be disregarded as entirely due to the authority's scheme. The House, by a majority, held that the interests had to be assessed as they stood in the real world at the date of notice to treat, taking account of the notice to quit.^[7]

2.5      In our view, in accordance with the general principle of "equivalence", the interests of both lessor and lessee in such a situation should be valued as they would have been if they had been no compulsory purchase.^[8] Furthermore, it should make no difference that the lessee's interest may have been terminated by notice to quit before the authority takes possession. Accordingly, our recommended definition of the right to compensation needs to cover the case where an interest ceases to exist as a result of compulsory purchase. In our later recommendation relating to the valuation date, we shall include a provision to ensure that in such cases, the relevant interests are valued as though still in existence at the valuation date.^[9]

"Qualifying interests"

2.6      The Bill currently before Parliament includes a definition of "qualifying interest" for the purpose of the proposed provisions for "loss payments".^[10] For this purpose it is provided that the interest needs to have subsisted for a period of not less than one year before the valuation date.^[11] We do not at this stage propose to apply the one year requirement more generally. There is currently no specific limitation to that effect in compensation law. On the other hand, there are special procedural rules for "minor tenancies",^[12] and certain compensation rules (which we propose to retain) may have the effect of excluding or reducing compensation in relation to recently created interests.^[13] Consideration will need to be given to harmonising the different provisions, if (as we would recommend) the new "loss-payment" provisions are in due course consolidated with our proposed Code.

Consultation

2.7      There was no disagreement with the principle of the proposal, although it was recognised that the detail would be subject to further consideration. We have revised the wording to accord with the scope of the Code as now proposed.
2.8      Accordingly, we recommend:

Rule 1 Right to compensation

This Code confers a right to compensation, assessed in accordance with the following provisions, on an owner of:

(1) any interest in land which is acquired by, or ceases to exist by reason of, compulsory purchase;

(2) any right over land subject to compulsory purchase, which is overridden in the exercise of statutory powers.

Basis of compensation

Introduction

2.9      Proposal 2 in CP 165 was as follows:

The right to compensation shall be a right to an amount (not less than nil),^[14] assessed in accordance with the principle of fair compensation, having regard to the following matters (as defined below): market value of the subject land; disturbance; injury to retained land (severance or injurious affection, less betterment); (where applicable) equivalent reinstatement.

2.10      This proposal arose from consideration of three preliminary issues:

(1) whether there should be an express statement of the general objective of the Compensation Code;

(2) whether the traditional heads of compensation should be preserved;

(3) whether compensation should continue to be treated as a "single global figure".^[15]

2.11      We noted that there is at present no statutory statement in the Act of the general principle of "fair compensation", which is said to underlie the compensation rules. That expression was taken from a recent statement by Lord Nicholls of Birkenhead in the Privy Council:

… no allowance is to be made because the resumption or acquisition was compulsory; and land is to be valued at the price it might be expected to realise if sold by a willing seller, not an unwilling seller. But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss. Conversely, and built into the concept of fair compensation, is the corollary that a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount. It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail.^[16]

2.12      We considered that compensation should continue to be assessed under the traditional heads (subject to the comments made below). We did not favour giving the Tribunal a general discretion to depart from the detailed rules, in order to achieve "fair compensation".^[17] Such a general discretion is given, for example, by the Australian Commonwealth statute,^[18] which provides that the amount of compensation is to be such amount as will "justly compensate", regard being had to "all relevant matters", including (but not limited to) the traditional heads. However, we thought that such an unrestricted discretion would create undue uncertainty as to the circumstances in which those heads were or were not to be applied. On the other hand, we thought that a statement of the principle of "fair compensation", as a matter to be taken into account in applying the traditional heads of compensation, would be a useful aid to interpreting the more detailed rules, and would help to ensure that they are construed liberally with that objective in mind.^[19]
2.13      As we noted,^[20] the treatment of compensation as a "single global figure" is well established:

… in spite of the separate heads under which compensation is traditionally assessed, it is said to represent "in essence one sum". Historically, the rule was important in relation to tax law, which treated the compensation payment as a whole, as the price for sale of the land. However, this position has been modified by statute, which allows apportionment between capital and income elements.^[21] It may also be significant in other respects. For example, the statute provides for interest to run on the whole compensation sum from the date of entry, and makes no distinction between the different elements.^[22]

We proposed to retain this approach.

Consultation

2.14      Our proposal was supported by the great majority of respondents.
2.15      Some considered that the principle of "equivalence" should form part of the statement of the general objective. This expression is also well-established in compensation law, as in the law of damages.^[23] Thus, in Horn v Sunderland Corporation Scott LJ referred to the "principle of equivalence", that is:

… the right [of the owner] to be put, so far as money can do it, in the same position as if his land had not been taken from him. In other words, he gains a money payment not less than the loss imposed on him in the public interest, but on the other hand no greater.^[24]

However, we have preferred to use the term "fair compensation", following the most recent authoritative statement of the principle. As Lord Nicholls' statement makes clear, that subsumes the principle of equivalence, while acknowledging that it is qualified by other rules, peculiar to the compensation code, such as the no-scheme rule and the market value rule.

2.16      A minority of respondents argued that the fairness principle should be an overriding objective (as in the Australian example cited above). Thus, the Tribunal should have the discretion to order compensation that is fair in all the circumstances where the rules prove to be inadequate. However, the majority supported our view that this would create undesirable uncertainty.
2.17      We have, however, decided to depart from the Consultation Paper proposals in one significant respect. Several consultees suggested that the requirement to treat compensation as a "single global figure" was unnecessary, and could create problems, for example where different dates of assessment are used, and interest may have to run from different dates. On further consideration, we agree with that view. Although the principle is well established, we are not convinced that it is of more than historical significance, or a necessary part of a modern code. For example, where a business is acquired, compensation for the land will be based on the value at the date of entry, but the claim to loss of profits may include both past and future elements, continuing up to the date of assessment and beyond. Although that loss will need to be capitalised, there is no obvious reason to require it to be assimilated in every respect to the award for the land. The Tribunal should be able to deal with the different elements in the manner which is fairest and most convenient from a valuation point of view. This approach needs to be matched by similar flexibility in the rules for the running of interest.

Structure of the Code

2.18      Since this proposal sets the scene for the whole Code, it needs to be based on a logical relationship between the different heads. As we have said, the underlying principle of statutory compensation is that the owner is entitled to be "compensated fairly and fully for his loss". This is no different in substance from the rules governing common law damages for equivalent torts, for example trespass to land or nuisance. There are, however, certain important differences derived from the nature of compulsory purchase, notably:

(1) The compensating body is not a wrongdoer, but a public authority acting in the public interest;

(2) The acquisition is not an isolated event, but is designed as part of a project in the public interest, which is carried out over a period, and which may itself have adverse or beneficial consequences for the claimant's interests;

(3) Compensation for compulsory acquisition is a hybrid: part consideration for the acquisition of land, part compensation for the injurious consequences of that acquisition.

2.19      The first point underlines the need to ensure that the rules are fair to both parties, and in particular that the compensation is not distorted by the pressure of the public need. The second makes it necessary to have rules to determine the date or dates at which compensation is to be assessed; and as to the extent to which the effects of the project, as opposed to the acquisition, are to be reflected in the compensation. The third provides justification for taking the value of the subject land as the starting-point for assessment. Although historically both elements – consideration and compensation – were treated as part of the "value of the land" to the owner, this was a fiction made necessary by the wording of the 1845 Act.^[25] We see no reason to preserve it in a new Code.
2.20      Turning to the new Code, it is logical that the starting point should be the market value of the subject land at the valuation date. This provides a generally fair and objective test of the consideration element. We have reconsidered the relationship of the other two main heads of compensation – consequential loss and injury to retained land. We think that the latter should also be assessed by reference to the diminution in the market value of the land at the valuation date.^[26] Not only does this provide an objective measure, but consistency with the rule for the subject land will simplify the valuer's task. This therefore will be the second head of compensation. The third head will be "consequential loss". As we explain later,^[27] we think that this is not, and should not be, confined to "disturbance", in the traditional sense of damage resulting from disturbance of occupation. It will cover any loss to the owner (whether or not related to the occupation and use of the subject land itself) which is properly attributable to the acquisition and not too remote, so far as that loss is not reflected in the first two heads based on market value. The fourth head, applicable only where the special rules are satisfied,^[28] is equivalent reinstatement.
2.21      Accordingly, we recommend:

Rule 2 Basis of compensation

Compensation shall be assessed in accordance with the principle of fair compensation, having regard to the following heads (so far as applicable in the particular case):

(a) Market value of the land subject to compulsory acquisition ("the subject land");

(b) Injury to, or betterment of, any other land held with the subject land ("the retained land");

(c) Consequential loss;

(d) Equivalent reinstatement.

Note 1    CP 165, para 4.2ff.    [Back]

Note 2    We use the term “overridden” to describe this effect. See paras 9.6 – 9.13 below.    [Back]

Note 3    CP 165, para 5.75ff. At the same time we proposed to retain the rule that the burden of compensation cannot be increased by interests created since the notice to treat, or enhancements made or interests created with a view to increased compensation: paras 5.63 – 5.68.     [Back]

Note 4    See the discussion of the Valuation Date: paras 6.1 – 6.7 below. Note that the Government has tabled amendments to the Planning and Compulsory Purchase Bill 2002/03 with regard to the valuation date: see paras 1.21 – 1.22 above.     [Back]

Note 5    Rugby Water Board v Shaw-Fox [1973] AC 202.     [Back]

Note 6    Agricultural Holdings Act 1948, ss 23, 24(2)(b).    [Back]

Note 7    See Appx D, paras D.84 – D.85. The effect of this decision, in the context of agricultural holdings, was reversed by statute: 1973 Act, s 48. Otherwise it remains good law. It was followed reluctantly in Australia: Road Construction Authority v Tiligadis [1988] ACLD 203 (Gobbo J).     [Back]

Note 8    We respectfully prefer the dissenting speech of Lord Simon in the Rugby Water Board case; he described the majority’s reasoning as “artificial, legalistic and destructive of the fundamental principles on which compensation is assessed…” ([1973] AC at p 241H). In CP 165 para 5.79, we indicated our intention to follow Lord Simon’s approach, but this point was overlooked in the formulation of our proposals for “project disregard”.     [Back]

Note 9    See Part VI Rule 10(1) below.    [Back]

Note 10    The Bill proposes to amend the 1973 Act by insertion of new sections 33A–K. Section 33A(4) defines a “qualifying interest” for this purpose.     [Back]

Note 11    Ibid s 33A(4)(a)–(d).    [Back]

Note 12    See paras 9.13 – 9.17 below.    [Back]

Note 13    See Rule 11 and paras 6.9 – 6.12 below. See CP 165 Proposal 7(4) (interests created since notice to treat); CP 169, paras 6.3 – 6.8.    [Back]

Note 14    For the reasons explained in Part III, we think that qualification “not less than nil” should apply only to head A (market value of the subject land): see paras 3.9 – 3.11 below.     [Back]

Note 15    CP 165, paras 4.5ff.    [Back]

Note 16    Shun Fung at p 125, per Lord Nicholls (emphasis added).    [Back]

Note 17    Following the “just compensation override” proposed by the Australian Law Reform Commission, and adopted in Australian legislation: CP 165, paras 4.7 – 4.10.     [Back]

Note 18    LAA (Cth), s 55(1).    [Back]

Note 19    CP 165, para 4.6.    [Back]

Note 20    CP 165, para 4.13.    [Back]

Note 21    See CP 165, paras 8.51 – 8.52.    [Back]

Note 22    See CP 165, para 8.33.    [Back]

Note 23    See the classic statement in Livingstone v Raywards Coal Co (1880) 5 App Cas 25, per Lord Blackburn: where an injury is to be compensated by damages, in settling the sum to be given for reparation of damages you should as nearly as possible get at that sum which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong….    [Back]

Note 24    (1941) 2 KB 26, 42.     [Back]

Note 25    1845 Act s 63 (1965 Act s 7) required regard to be had to the “value of the land to be purchased”, and to injurious affection to other land, but made no express provision for other consequential loss. It was accordingly treated as part of the “value to the owner”, and as such was preserved by rule (6) of the 1919 rules: see CP 165, para 4.20.     [Back]

Note 26    See paras 3.20 – 3.24 below.    [Back]

Note 27    Paras 4.4 – 4.5 below.    [Back]

Note 28    Para 4.43 below.    [Back]