The Law Commission

PART V

THE COMPENSATION CODE – GENERAL RULES

Introduction

5.1      In Part V of CP 165,^[1] under the heading "Incidental Rules", we considered various unconnected rules, which form part of the existing law and which we proposed for inclusion in the new Code. They related to:

(a) Prospects of lease renewal

(b) Rehousing obligations

(c) Illegal uses

(d) New interests and enhancements

(e) Consistency

(f) Mitigation

Of these points, only (c) gave rise to any significant controversy in the responses to consultation. However, we have reconsidered each of the points in the context of our overall revision of the Code. As noted below, discussion of some of the issues is postponed to Parts VI and VII, covering matters to be disregarded in the valuation. The remaining matters (that is, items (c), (e), and (f)) will be included in the draft Code as "general rules".

Prospects of lease renewal

5.2      Where an interest is limited in time, such as a lease, the nature of the limitation will clearly affect the market value of the interest, and will therefore be taken into account in assessing compensation based on market value (under head A).^[2] It may also be relevant to a claim under other heads. For example, a claim for loss of profits of a business on the acquired land will need to reflect any lack of security in the occupation of the business premises. However, account will also need to be taken of any security given by statute,^[3] or any right to renewal under the lease itself. Such prospects are relevant to market value, in so far as they would enhance the interest available to a willing buyer. They are also relevant to the security of the assumed profits of a business on the land.
5.3      Even where there is no enforceable right to security, the circumstances may be such that the prospect of renewal should fairly be taken into account. For example, the known policies of a public authority lessor may be such that renewal of a lease may in practice be assumed, in the absence of a particular public requirement. The strength of such prospects, and how they should be reflected in the valuation, are matters to be determined on the evidence in any particular case.

Example A disused cinema was let by the GLC to the claimant on an eighty year lease that was due to expire in 1984. In 1963 conditional planning permission had been granted for the erection of a supermarket and other shops. In 1968 the council's valuer said he would recommend that the GLC enter into a new long lease with the claimant. The claimant applied in 1970 for planning permission to demolish the cinema and to erect shops on the site, but it was refused on the basis that the site might be needed for future road improvement schemes. The claimant accordingly required the local authority (Southwark) to purchase their leasehold interest and were entitled to compensation on the basis that their interest had been acquired compulsorily. The Tribunal held that, apart from the road scheme, the market would have assumed that planning permission would have been granted for development of the site, and also that the GLC would have been likely to grant a new lease. The Court of Appeal upheld the decision; nothing compelled or permitted the tribunal, in assessing compensation for a leasehold interest, to ignore evidence known to the market of the likelihood of renewal. 1 Trocette Property v GLC (1974) 28 P&CR 408.

5.4      In CP 165, we proposed a rule to cover this point "in the interests of certainty and the avoidance of doubt":

(1) Where an interest is limited as to time or may be terminated by another person, regard shall be had (in assessing compensation for that or any other interest in the subject land) to the likelihood (in the absence of the relevant project) of the continuation or renewal of the interest and the likely terms and conditions on which any continuation or renewal would be, or would have been, granted.

5.5      In making this proposal, we noted that, at one time, the prospect of renewal under Part II of the Landlord and Tenant Act 1954 was specifically excluded from consideration;^[4] and that it might be desirable to confirm the reversal of that position in the new Code. We also had in mind the parallel of the Australian Commonwealth Code, which provides that, if the interest is limited in time or may be terminated by another person, there is to be taken into account

the likelihood of the continuation or renewal of the interest and the likely terms and conditions on which any continuation or renewal would be granted.^[5]

5.6      On further consideration, however, we think that such a provision is an unnecessary complication, and may indeed give undue emphasis to this aspect. As indicated above, any genuine prospects of renewal will be taken into account under the ordinary rules, in so far as they affect market value or the assessment of consequential loss. There is no need for an express statement to that effect. Furthermore, the issue is no different in principle from that which may arise in relation to covenants in the lease. The profitability of a use may be affected by covenants restricting the use of the premises.^[6] If so, it may be necessary to consider the likelihood of a relaxation,^[7] and the terms on which it would be granted.
5.7      Another consideration is that the words in our proposal "(in the absence of the relevant project)" would need further elaboration. As they imply, this aspect raises issues which overlap with those relevant to the issue of "project disregard".^[8] The project may affect, not merely the prospects of extension or renewal of the interest, but its actual existence at the valuation date.^[9] We propose to deal with this issue as a specific exception to the rules for the valuation date by requiring the effects of compulsory acquisition on the existence and nature of the interests to be disregarded.^[10]

5.8 Accordingly, we do not include this proposal in our recommendations.

Rehousing obligations

5.9      This is considered in Part VI (Rule 12) below.

Illegal uses

The scope of the rule

5.10      Rule (4) in section 5 of the 1961 Act is as follows:

Where the value of the land is increased by reason of the use thereof or of any premises thereon in a manner which could be restrained by any court, or is contrary to law, or is detrimental to the health of the occupants of the premises or to the public health, the amount of that increase shall not be taken into account.

Although the rule refers in terms to "the value of the land" it has been held to apply also to the assessment of compensation for disturbance.^[11] We would expect it also to apply to compensation for severance and injurious affection.^[12]

5.11      There is a surprising absence of authority on the interpretation of rule (4). One issue, which has been brought to light since the publication of CP 165,^[13] is whether rule (4) is concerned with breaches of private law, such as breaches of covenants in a lease. The wording of the rule is clearly wide enough to cover such breaches, since (whatever the precise meaning of "contrary to law") they involve use of the premises in a way "which could be restrained by any court". On the other hand, it is difficult to see any public policy reason for automatically excluding such value, if it could be shown that in practice the lessor had not objected, and would not object, to the use. As in the case of the prospects of a lease extension,^[14] one would expect it to be a matter of evidence as to how far the market value would be affected by the contravention.
5.12      We did not address this point in CP 165. We proposed to retain a simplified version of the rule, referring simply to uses "in a manner, or for a purpose, contrary to law".^[15] This was intended to give effect to Government policy, already stated, that compensation should not include "the value of any illegal activity".^[16]

Consultation

5.13      The main issue raised in consultation was whether there should be any exceptions to the rule, for example for cases where the breach is unintentional, or technical and easily remedied. Responses were evenly divided on this point. Although local authorities and most legal practitioners were opposed to any exception, others favoured a limited exemption subject to the discretion of the Tribunal. For example, the exemption might apply to a use of land in breach of planning control, where consent might reasonably be expected to be granted. Other suggested exceptions related to private law restrictions, for example restrictive covenants where there is no realistic prospect of enforcement.
5.14      In so far as they refer to private law restrictions, these responses underline the need for a more precise definition of "contrary to law". In our view, the basis of the rule lies in public policy considerations, and the scope of the rule should be limited accordingly. We recognise that this poses problems of definition, since there is no precise definition of "public" law suitable for the purpose. However, we think the purpose of the rule will be adequately expressed by confining it to uses which are criminal or otherwise prohibited by statute.
5.15      One respondent suggested that "immoral uses" should also be excluded, citing the example of premises used for prostitution. However, this would be a significant, and ill-defined, extension of the existing rule. Some cases, for example premises used as a brothel would be covered by the "criminal" exclusion.^[17] However, where an arguably "immoral" use has not been regarded by Parliament as justifying a criminal sanction, there seems no reason for the compensation code to take a more purist view.^[18]
5.16      We are also persuaded, on balance, that there should be a power for the Tribunal to allow exemption, wholly or partially, from the rule in limited cases. The most obvious example is a minor breach of planning control, where permission could reasonably be expected if an application were made. In view of the generous planning assumptions made elsewhere in the Code,^[19] it would seem illogical to exclude this possible element of value. We do not think that it is possible or appropriate to define precisely the circumstances in which an exception should be allowed. It should be a matter for the discretion of the Tribunal, having regard to the nature of the breach and the ease of remedy.^[20]
5.17      The wording of the proposal also needs to be amended to make clear that it applies to all heads of compensation, including consequential loss and loss to retained land.
5.18      Accordingly we recommend:

Rule 7 Illegality

(1) (1) Subject to (3), in assessing compensation under any head, there shall be disregarded any element of value or loss, which is attributable to a use which is contrary to law.

(2) (2) For this purpose a use is "contrary to law" in so far as it involves a criminal offence, or is otherwise prohibited by statute.

(3) (3) The Tribunal may disapply this rule (wholly or partially) if satisfied that it would not be contrary to the public interest to do so, having regard in particular to the nature of the breach and its ease of remedy.

New interests and enhancements

5.19      These will be discussed in Part VI.^[21]

Consistency

5.20      It is well-established that the claims under the various heads must be mutually consistent.^[22] Thus, for example, if the subject land is valued as having potential for development which would involve displacing the business in any event, no separate claim can be made for disturbance.

Example The claimant owned a farm which he used for his horse breeding business. It was compulsorily acquired. The claimant claimed (i) compensation in respect of the farm on the basis that the land was a building estate ripe for immediate development and should be valued as such, and not as a farm and (ii) various other sums as compensation for the disturbance of his horse breeding business as a consequence of the compulsory acquisition. The value of the land as building land was far in excess of the value of the land considered as agricultural land. The Court held that these claims were inconsistent with one another, since the claimant could only realise the building value of their land if he was prepared to abandon the horse breeding business. It awarded compensation for the land valued as building land, but refused the claim for compensation for disturbance. 1 Horn v Sunderland Corp [1941] 2 KB 26.

5.21      Likewise with severance: if the land being acquired is valued on some basis which assumes severance from the retained land, for example for some alternative development, that element of severance should not be the subject of compensation.^[23]
5.22      This rule is probably implicit in the principle of "fair compensation". However, we proposed that the principle of consistency should be the subject of an express provision as one of the incidental rules of the Code. This proved uncontroversial on consultation. ^[24]
5.23      Accordingly we recommend:

Rule 8 Consistency

Where the market value of an interest in the subject land is assessed on the basis that the land had potential to be developed or used for a purpose other than the purpose for which it was occupied at the valuation date, compensation shall not be allowed under other heads (consequential loss or injury to retained land) in respect of loss or damage that would necessarily have arisen in realising that potential.

Mitigation

5.24      Equally well-established is the principle that a claimant must take reasonable steps to mitigate the loss caused by the compulsory acquisition. Our proposal, in line with the Government's Policy Statement, limited the duty to the period from the first notice date, which is also the proposed starting date for potential claims for consequential loss.^[25]
5.25      This proposal was uncontroversial. We have, however, reworded it to conform more closely to the common-law rule,^[26] and to emphasise that the burden is on the authority to prove failure to mitigate. As explained when discussing Consequential Loss,^[27] we think it should be made clear that the personal circumstances of the claimant are relevant in considering what is reasonable by way of mitigation.
1. .26 We accordingly recommend:

Rule 9 Duty to mitigate

(1) If it is shown by the authority that the claimant has (since the first notice date) unreasonably failed to take steps that were open to him to mitigate his loss, the compensation otherwise payable shall be reduced by the amount of such loss as could have been avoided by taking such steps when it was reasonable to do so.

(2) For the avoidance of doubt, in deciding what is reasonable under (1) the personal circumstances of the claimant (including age, illness, disability or financial circumstances) shall be taken into account.

Note 1    CP 165, paras 5.55ff.    [Back]

Note 2    Paras 3.1 – 3.7 above.    [Back]

Note 3    For example, for business premises under the Landlord and Tenant Act 1954, Part II.    [Back]

Note 4    Section 39(1) of the Landlord and Tenant Act 1954, which required the right to a new business tenancy under that Act to be excluded in assessing compensation, was repealed by 1973 Act, s 47. Accordingly, the prospect of a renewal can now be taken into account.    [Back]

Note 5    LAA (Cth), s 55 (2)(d).    [Back]

Note 6    See eg Mean Fiddler v Islington LBC [2003] 44 EG 170 (considered below at para 5.11 under “Illegal uses”).     [Back]

Note 7    For example, the lease may provide that consent to a variation of user “shall not be unreasonably refused”.    [Back]

Note 8   See Part VII below.    [Back]

Note 9   See the Rugby Water Board case (discussed in para 2.4 above; Appx D, paras D.84–86).    [Back]

Note 10   See Part VI below, Rule 10 (2)(a) proviso. This is intended to reproduce more generally the effect of 1973 Act, s 48 (which reversed the effect of the Rugby Water Board case in relation to agricultural holdings).    [Back]

Note 11    Disturbance compensation, historically, was treated as part of the “value to the owner” of the land: Hughes v Doncaster BC [1991] AC 382.     [Back]

Note 12    See CP 165, para 5.3.    [Back]

Note 13    In Mean Fiddler v Islington LBC [2003] 44 EG 170 the assessment related to the compensation for displacement of a nightclub. The authority argued that the use was in breach of a covenant in the lease, and should therefore be excluded under rule (4). Before the Court of Appeal, the only issue was the proper construction of the covenant in question, and it was unnecessary for the Court to consider the effect of rule (4). However, Carnwath LJ commented: …, the authority take a legal point, that any additional value attributable to that use should be excluded under section 5(4) of the Land Compensation Act 1961, as being a use which is unlawful or could be restrained by a court. That question is not before us. At first sight, I find it a surprising submission, in relation to what I understand to be a provision directed to breaches of the general law, such as, for example, of planning restrictions… [2003] 44 EG 170 para [6].    [Back]

Note 14    See paras 5.2 – 5.8 above.    [Back]

Note 15    In this respect, we followed the Australian Law Reform Commission, who thought that the other parts of the rule (detriment to health, restraint by a court) were sufficiently encompassed by the term “contrary to law”, and therefore otiose: the ALRC Report, para 253.    [Back]

Note 16    Policy Statement, Appx, para 3.20. This involved the rejection of a recommendation by CPPRAG: see CP 165, para 5.62.    [Back]

Note 17    For example, under s 33 of Sexual Offences Act 1956 it is an offence to keep or manage a brothel or to act or assist in the management of a brothel.    [Back]

Note 18    For example, the value attributable to gambling, in premises licensed for the purpose, should not be excluded, merely because some might regard the activity as “immoral”.     [Back]

Note 19    See Parts VII and VIII below.    [Back]

Note 20    The Illegality Defence in Tort, Consultation Paper No 160, paras 6.6 – 6.30.    [Back]

Note 21    See paras 6.9 – 6.12 below.    [Back]

Note 22    See CP 165, para 4.43.    [Back]

Note 23    See CP 165, paras 5.9 – 5.10 and cases cited.    [Back]

Note 24    One respondent was concerned that our formulation (based on the Australian LAA (Cth), s 57) might exclude some claims for professional fees. However, we do not see why this should be so, if the fees are fairly attributable to the compulsory acquisition. In any event this point can be considered in the detailed drafting.     [Back]

Note 25    See para 4.40 above.    [Back]

Note 26    Chitty on Contracts (28th ed 1999) 27–086 – 27–087, citing British Westinghouse Electric Co Ltd v Underground Electric Rys [1912] AC 673, 689.    [Back]

Note 27    Paras 4.27 – 4.30 above.    [Back]