The publication of the consultation document on Compulsory Purchase – Compensation Reforms by the Department for Levelling Up, Housing, and Communities (DLUHC) has sparked considerable debate regarding its practicality, and the need for the issues raised in the consultation document. As surveyors working in compulsory purchase, we are asked to put ourselves into a hypothetical world, but arrive at a value equivalent to open market value in the real world. A bit of a quandary, to say the least!
Valuing in the no-scheme world
The consultation document recalls the contradiction highlighted by the debates had in conferences with Counsel, planning advisors, and the legal team in Transport for London v Spirerose Limited (2009). We discussed the probability of the claimant obtaining planning consent in the no-scheme world, taking account of all factors planners would normally consider when deciding on an application. We concluded that it was most likely 50/50 as to whether planning consent would be granted for the proposed development scheme.
If the chance of obtaining consent is slightly more than 50% (even 51%) that chance is currently converted into a certainty in compulsory purchase, by the use of Certificates of Appropriate Alternative Development (CAAD). However, if it is 49% or less, then the claimant would not receive consent or a positive CAAD.
In the real world, it is black and white. You either obtain planning consent, or the application is refused; your opinion of market value is thus informed.
So, is it appropriate for a valuer to adjust their valuation of a property subject to compulsory acquisition to reflect the probability of receiving consent in a no-scheme world?
The circumstances are even more stark in the HS2 cases at Curzon Street, where various property owners all claim development value for student housing and have received CAAD’s for such use. In the ‘real’ planning world, it is apparent that the positive CAAD’s, if converted to planning consents, far out-weigh the demand for student housing in the area.
In the context of the real world, the probability of all the claimants receiving planning consent is well below 50%. Therefore, the valuation may reflect existing use, with some uplift to reflect the hope of obtaining consent for student housing. The result is that the valuer arrives at open market value in the real world that should also equate to the value in a compulsory acquisition world.
However, in the ‘compulsory acquisition world’, each building is valued in isolation. Assuming the buildings have each been granted positive CAAD’s as if each building has 100% probability of obtaining planning consent in the real world, then full development value can be claimed, which is different to how the market actually works. It will be very interesting to see how the Supreme Court tackle this somewhat strange situation.
Making a change
The clue is in the name: hope value which broadly considered as market value with ‘the prospect of development where there is no current permission for that development’ (Red Book Global 2022). So, taking this a step further, is it the planning provisions in the code or the valuation guidance that needs to change?
Do valuers require a clear set of principles identifying, in these situations, a distinction between the concept of hope and the concept of realistic and defined development in compensation terms?
Are the government going in the right direction in Paragraph 16 of the consultation document?
We intend to amend sections 14 and 17 of the Land Compensation Act 1961 to:
- Reflect normal market conditions in compensation payments by only allowing the equivalent of planning certainty for appropriate development if a CAAD is obtained in relation to that AAD.
A CAAD helps to turn ‘hope’ into something more tangible and certain for a valuer. However, it is still only a valuation tool for use in an artificial scenario. This scenario then has to play out in valuation terms but can easily lead to assessments of value higher than could actually be expected in the open market.
Explained with an example
The best way of looking at this is to compare two identical properties: Property A and Property B, both worth £1m under Rule 2, with the benefit of planning consent or a CAAD giving an established planning position.
The owner of Property A has full planning consent at the point which the property is compulsorily acquired. They have taken all the risk and expense associated with obtaining planning consent, which may have cost many thousands of pounds to obtain. Say it has cost them £100,000 in professional fees and application costs to obtain planning consent; they then sell to the acquiring authority for £1m, meaning the net value of Property A received by the owner is £900,000.
The owner of Property B does not have the benefit of planning consent. For argument’s sake, Property B may therefore only be worth £500,000 in the open market in its existing use plus the hope of obtaining a consent, should they choose to sell at some point in the future. However, as the property is being compulsorily acquired, they could make an application for a CAAD, the costs of which can be compensated. The property owner may submit a few sketches to support the proposal, later receiving a CAAD for a very similar development to the planning consent granted for Property A.
In this scenario, the owner of Property B has not taken any risk at all, not spent a significant amount of money to achieve a positive CAAD, and, as a result, at the valuation date will be entitled to make a claim for, and receive full development value (considered to be open market value in this scenario) for the property, as if full planning consent was in place.
This would not happen in the real world. If the owner of Property B wanted to receive £1m rather than £500,000, they would have to take the risk of making the planning application and incurring the associated costs. Should guidance be issued by the RICS to smooth this inconsistency out rather than statute or code changes?
If a positive CAAD is issued on Property B, should an adjustment be made to the £1m to reflect risk and cost as if the claimant had achieved full planning consent in the real world? Essentially, guidance to relate the CAAD to a hope value methodology rather than full development value.
Arguably, this approach would give parity, be fairer, and be more aligned with the Levelling Up agenda. It would also enable a more collaborative approach, not only between Governmental departments, the RICS and CPA, but would also eliminate some of the confrontational aspects within negotiations on these claims. It could also provide greater consistency and certainty, benefitting all involved in compulsory purchase activities.
The proposal to ‘remove the requirement that acquiring authorities pay the costs of landowners in seeking a CAAD’ is a step in the right direction – but does it go far enough to reflect a no-scheme scenario?
Making the Code more ‘user friendly’ and fairer for all concerned must be the correct approach. The question is: does legislation have to change in respect of s14 and s17 of the Land Compensation Act 1961 to achieve a fairer system, or is it more important that the valuation methodology is altered, with additional guidance from RICS?
It is also worth acknowledging the immense pressure that these changes would inflict on an already overstretched planning system. Many Local Authorities are weeks, if not months, behind on ‘normal’ planning determinations. How will they cope with the additional burden of a possible influx of CAADs under this new regime?
The Government have proposed to ‘further streamline the process for obtaining a CAAD so that the ask on local planning authorities is simpler and clearer – local authorities will be asked to only issue a CAAD in relation to the type(s) of AAD applied for’. It may be a little sceptical, but I don’t think that Local Authorities will be too relieved at this proposal… significant thought needs to be given to resource and specialism to make this work.
The proposals are for ‘a further measure to allow acquiring authorities to request a direction from the Secretary of State that, for a specific scheme, payments in respect of hope value may be capped at existing use value or an amount above existing use value where it can be shown that the public interest in doing so would be justified.’
The text goes on to refer to ‘certainty for an acquiring authority… schemes would then have more confidence in their property cost estimates…avoid lengthy disputes…Landowners would remain entitled to a fair price for their land. No-one would be paid less than existing use value…’
I am not convinced that this approach is fair, not least because it is artificially adjusting the market. Artificial adjustments to the market seem, to me at least, to make significant impacts elsewhere which are equally unpalatable. If they’re going to try to use budget certainty as an excuse for not paying full market value, perhaps the solution needs to focus on more innovative ways for acquiring authorities to capture value, or on a more proactive use of CAADs by acquiring authorities to essentially set the tone on the value of land and property, where it may be considered that there is hope or the prospect of development for a more valuable use.
Looking at Land Value Capture from a different perspective, the only study that I am aware of relating to this topic was undertaken following the construction of the Jubilee Line which opened in part in late 1999, with remaining sections opening in 2000. At a very high level, the total cost of building the Jubilee Line extension from Green Park to Stratford was around £3.5 bn. However, when drawing contours around the station sites along the route, as well as the more general benefits of a brand-new underground railway serving areas south of the Thames, it has been shown that the property values have risen by approximately three times the total build costs of the Jubilee Line. It’s quite easy to see how taxation or artificial adjustments to the market relating to acquisition price could recover some of this windfall but I am not convinced that this is the solution.
On property acquisition price, the cost of land for a large infrastructure project is relatively small in overall cost terms. From experience it accounts for between 5% and 10% of the total project cost. On the example above, the property cost was less than 5% of the total cost of building the Jubilee Line. Adjusting between the difference in existing use value and development value as set out in the consultation document is unfair to the landowner and makes only a very marginal positive impact on the overall cost of a project. Maybe more value can be recovered, for example, by acquiring authorities spreading the net a little further, look at introducing as part of the compulsory purchase, regeneration projects around transport hubs or stations, and take part in the uplift in value rather than looking to “tax the uplift” and impact the community they are trying to enhance.
Acquiring authorities have, to a greater extent, lost the skills and knowledge of how to implement and use compulsory purchase. Those that do use their powers are often so fixated on their scheme they very rarely (never is probably more accurate) think outside the box, and look to use those extensive powers not only to implement their project, but also to benefit the wider community. We need to move away from obtaining compulsory purchase powers just to build a railway, or a road or an airport for example. We need to think about introducing projects that capture the aspirations of more than one “agency” or agenda because in that way, levelling up can really be achievable, communities will benefit and as such so will the country.
Communities coming together, deciding what they want, but in collaboration with Local Authorities and infrastructure providers. Levelling Up can, and does, mean different things to the whole country, depending on where you are.
From a property and compulsory purchase perspective, its emphasis needs to be on joining up towns and cities, joining up ports and distribution facilities, promoting culture and art and making far better places for people to live, work and enjoy.
We as professionals working in compulsory purchase must lead from the front and become a vital cog in the machine, which is levelling up the country.
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