UK compulsory purchase regime – reform to the compensation framework

Current position

Any landowner whose land is compulsorily acquired is entitled to compensation for its loss.  For many years, the amount of compensation payable has been based upon the principle of  “equivalence” – the landowner should neither be financially better nor worse off because of the CPO.  

Multiple heads of compensation make up the final sum due to a landowner.  One of these is the open market value (in a non-CPO world) of the land to be acquired. This is currently the value taking into account any existing planning permissions, as well as the prospect of obtaining planning permission for development of the land were the CPO to be cancelled – known as “hope value”.  

As hinted at in the policy paper for the Levelling-up and Regeneration Bill, the government intends to reform the hope value element of a CPO compensation claim to ensure that CPO schemes are “viable and deliver the benefits that are necessary in the public interest”.       

Changing the ballpark on land value 

The most eye catching proposal is the suggestion to cap – or even remove – hope value from the assessment of market value.  This would mean that this element of compensation would be limited to the existing use value, or a percentage above this.  The aim is to provide acquiring authorities with greater certainty on their property cost estimates and improve the viability of the scheme, enabling more of the land value to be captured by authorities and invested in additional public benefits such as affordable housing and infrastructure improvements.  

Before making a CPO, public sector acquiring authorities would need to apply to the Secretary of State for a relevant direction in respect of a specific scheme, in order to secure a cap.  As part of the process, the acquiring authority would need to evidence how the land value captured would be applied towards public benefits and/or how the certainty over this aspect of compensation payments would benefit the scheme. 

An alternative proposal put forward is for hope value to be capped or removed across CPO schemes generally or for specific types of schemes. 

Practical implications

In the vast majority of cases, the government’s suggested changes will assist with a scheme’s viability, but at what cost? 

The proposals directly conflict with the principle of “equivalence”.  It seems fundamentally unfair that a landowner should receive less than the market value for their land simply because their land falls within the redline of a CPO scheme.  It also risks creating a two-tier land valuation system.  Land at risk of being compulsorily acquired at or close to its existing use value will see values depressed, in contrast to land whose development potential is unimpeded.  The proposals could, consequently, have human rights implications.

There is a risk that the proposals will not have quite the impact that the government imagines:

(a)    In practice, some acquiring authorities may be reluctant to apply for directions due to the risk of having to publicly disclose viability information and, in turn, risk opening up objections to the CPO on viability grounds, especially if a direction is refused. 

(b)    The government wants to see a “faster, more efficient compulsory purchase system”, but these proposals have a real risk of actually slowing down the process. An acquiring authority will need to apply to the Secretary of State for a direction; presumably the Secretary of State will then seek representations from those affected; and, given the significant implications, there is a risk that the Secretary of State’s decision to issue a direction will be judicially reviewed.  And all of this needs to run its course before the CPO is made.

(c)    The proposals are unlikely to significantly reduce the number of references made to the Upper Tribunal (Lands Chamber).  Unless it is ruled out altogether, the parties will still need to agree what the hope value is and, with a cap in place, a landowner is likely to push even harder for a higher value. 

Changes to the CAAD system

Currently a landowner can either apply to the local planning authority for a certificate of appropriate alternative development, or to the Tribunal for a ruling on what development (if any) is “alternative appropriate development” (“AAD”). 

If it is established that development is AAD, when calculating the market value of land, it is assumed that planning permission for that development is in force on the relevant valuation date.  The government argues that this doesn’t reflect what would happen in a “normal market transaction”.   In such circumstances, when determining the land value, a seller would instead have to factor in “the actual risk associated with the likelihood of planning permission being granted”.  As such, the government intends to introduce reforms to address this as part of the Levelling-up Bill while it passes through Parliament.  

It is proposed that AAD can only be established if a certificate is obtained from the LPA.  However, as these applications are complex and LPAs are already under-resourced, this could inadvertently lead to more appeals being lodged at the Tribunal, either against poor quality decision-making or non-determination by LPAs.  So why not continue to allow landowners to apply to the Tribunal in the first instance?  Further, these applications can only be submitted before a reference is made to the Tribunal, unless the acquiring authority’s or the Tribunal’s approval is obtained.  This in theory leaves the door ajar for an authority to make a reference to prevent, or at least make it harder, for a landowner to seek a certificate.

Landowners can currently recover the costs of submitting an application as part of their compensation claim but the government intends to remove this right.  This again clashes with the principle of “equivalence”.  Landowners wouldn’t  incur these costs if there was no CPO, so why should they have to swallow these costs to demonstrate what fair compensation is? 

Finally, LPAs will only be required to issue a certificate in relation to the types of AAD applied for.  This is reasonable as, at the moment, LPAs have to undertake the burdensome task of listing all types of development it considers to be AAD in the certificate. 

Next steps

Make your views heard and respond to the consultation before the closing date of 19 July. The consultation can be found here. 

Authored by Caroline Stares.