Published: 09 October 2017
Area of Law: Planning
Government create unfair two tier system for compensation for Compulsory Purchase
Failures in the transitional provisions bringing into effect Government’s legislation have created an unfair two tier system for Compulsory Purchase compensation lasting for at least 11 years. It’s created compulsory acquisition roulette, where the compensation entitlement varies depending on which scheme you are affected by.
The impact of the Bishopsgate decision on valuation
It is widely acknowledged amongst CPO professionals, even those acting or working for acquiring authorities, that the impact of Bishopsgate Space Management Ltd –v- London Underground Ltd decision on compensation for leasehold owners is unjust. The impact of the Bishopsgate decision is that it is assumed in calculating compensation due to leasehold owners that the landlord would terminate the leases at the first opportunity, whether or not this would happen in reality. This applies to periodic tenancies, tenancies with less than a year to run and tenancies for a term of year including break clauses. So for instance a tenant occupying under a 20 year lease with a break clause capable of termination on say six months notice, would be deemed to only have an interest in land of six months.
This affects the valuation of the leasehold interest taken (the rule 2 value) by limiting this to six months. Often there is little profit rent in a lease so the biggest impact on CPO compensation arising from this principle is often on Disturbance Compensation (the rule 6 value). Acquiring authorities argue in relation to disturbance compensation that claimants are only entitled to the costs of bringing forward a move by six months, rather than full relocation costs suffered as a result of the acquisition. In cases where relocation was not possible, acquiring authorities argue that claimants are only entitled to six months loss of profits. This argument is regularly run by those with CPO powers irrespective of the term left on the lease left to run, whether or not the break clauses are unconditional or not (they were unconditional in the Bishopgate case) and irrespective of the intentions of the landlord to leave tenants in situ. This a particularly unfair position when contrasted with the situation for businesses and others in occupation under licences, where account is allowed to be taken in calculating compensation of “the period for which the land occupied by [him] may be reasonably be expected to be available for the purposes of [his] trade of business”.
The Neighbourhood Planning Act 2017
Due in significant part to the lobbying efforts of the Compulsory Purchase Association, the Government finally promoted legislation to reform this principle in the Neighbourhood Planning Act 2017. Section 35 inserted new provisions into existing legislation allowing for account to be taken of the likelihood of continuation or renewal of the tenancy and the total period for which the tenancy may reasonable be expected to continue, including after any renewal, thus overcoming the Bishopsgate principle. This would be good news except the difficult issue of transitional arrangements.
The transitional provisions are currently set out in the latest commencement order under the Neighbourhood Planning Act 2017, which provides that s35 comes into affect in respect of compulsory acquisition powers authorised on or after 22 September 2017 . Thus the two tier system for compensation for business tenancies has been created. If you are for instance affected by Phase 1 of HS2, in occupation under a contracted out lease with 10 years to run but with an unconditional break clause exercisable on six months notice which would have been unlikely to have been exercised by either landlord or tenant your compensation may be severely limited by the Bishopgate principle. If you are in a similar position but affected by HS2 Phase 2a which does not yet have Royal Assent your compensation is likely to be higher.
The life of compulsory acquisition powers varies between the different mechanisms i.e. three years for CPO and more usually five years for Hybrid Bills and DCO’s. Following land acquisition there is then a six year limitation period for submission of compensation claims. Thus for the period of 11 years (or longer ) from 21 September 2017 there will be a two tier compensation system with the potential for the compensation paid to claimants to be wildly different depending on which CPO you were unfortunate enough to be impacted by and when it was confirmed. Decisions on the same facts decided on the same day in the Lands Chamber can and will result in very differing levels of compensation being paid. This was something that we did point out in our consultation response to the Government.
Is this really good news for acquiring authorities and why has the government let this situation arise.
Acquiring Authorities obviously have the duties to look after public money and are therefore likely to feel obliged to follow the Bishopgate decision resulting in potentially long and expensive disputes over the fair level of compensation. This is both undesirable for the public purse and extremely unfair for the affected Claimants. The obvious reason for failing to apply these provisions retrospectively are the cost to the public purse of paying fair and adequate compensation to leaseholders and the increase this would bring to infrastructure costs which were potentially assessed at lower levels. However case law is always at risk of being overturned (with retrospective effect) and we feel that they Government have taken the wrong decision in this case.
Alok Sharma announced with much fan fair last week the introduction of the new CPO compensation claim form and explanatory notes, which is widely acknowledge to be a good move. However if you happen to be one of the unlucky leaseholders with the wrong type of lease and affected by a CPO confirmed before 22 September 2017 getting your claim in properly is the least of your problems. Thereafter your claim will descend in the quagmire of arguments that the Bishopsgate principle creates. The Government have created an own goal with the transition provisions which certainly won’t “simplify and speed up” the compensation process.
What should you do now?
In terms of practical steps to try to avoid these difficulties leaseholders affected by compulsory acquisition powers should check whether they occupy under a tenancy which has the protection of the Landlord and Tenant Act 1954 as the original enactment of s47 of the Land Compensation Act 1973 provides statutory assistance in this instance. Where tenancies have been contracted out of the 1954 Act, it should be checked whether this has been done correctly. Leaseholders should also consider whether their break clauses are conditional or unconditional. We have recent first hand experience of an acquiring authority dropping a preliminary hearing in the Lands Chamber at the last minute on the applicability of Bishopsgate in respect of a lease with conditional break clauses. Whilst claimants need to be aware of s4, which prevents claimants creating interests to increase compensation entitlement, where the tenant has a related or supportive landlord consideration could be given to putting an appropriate lease in place to overcome these issues, although it would be likely to be helpful if this was done asap and certainly prior to land acquisition, in circumstances where other legitimate reasons exist to suggest the need for the grant of a new tenancy and on the basis of legal advice.