Compensation for acquisition of land – Disturbance compensation – Adaptation works – Bridging loan interest – Claimant’s own time – Loss of profits – Capital gains tax liability – Section 5(6) of Land Compensation Act 1961 – Whether cost of adapting alternative premises compensatable – Whether capital gains tax liability compensatable
The claimant was the freehold owner of a property
partly occupied by the claimant for the purposes of his optician’s business and
partly let to a firm of solicitors. Pursuant to a general vesting declaration,
the acquiring authority were deemed to have taken possession of the property in
January 1992 under a compulsory purchase order confirmed in 1990. On the
disposal of the property to the acquiring authority, the claimant incurred a
capital gains tax liability of £32,524.80. In August 1992 the claimant reopened
his business in alternative rented premises to which he made additions and
adaptations costing £49,478, but in respect of which he claimed £37,368.62. The
parties agreed the compensation for the value of the land taken and for a
number of items of disturbance. Four heads of claim remained in issue: (i) the
cost of extension and adaptation of the alternative premises, including
interest on a bank bridging loan (on one basis the acquiring authority
contended that nil compensation was payable); (ii) the claimant’s own time
amounting to £39,375 (the acquiring authority accepted only £8,300); (iii) loss
of profits amounting to £54,363 (the acquiring authority contended that no
compensation was payable); and (iv) the capital gains tax liability (the
acquiring authority contended that no compensation was payable).
satisfy certain tests of mitigation, causation and remoteness, no double
compensation, and no compensation where a claimant receives value for money.
The costs of a bank bridging loan were disallowed as the claimant failed to
apply for an early advance payment. The remaining costs were disallowed as the
claimant had received compensation for the loss of accommodation in the land
taken, and could not additionally be compensated for the cost of providing the
new accommodation, as this would amount to double compensation. In any event,
the claimant received value for money.
authority’s sum of £8,300 for the claimant’s own time was awarded as the claim
was unsupported and unreliable.
loss of profits in respect of the 1992 financial year; the claimant failed to prove
that any losses in subsequent years were caused by the dispossession.
Golightly & Sons Ltd v Durham County Council [1981] 2 EGLR 190
was not conclusive as to whether compensation was payable for the capital gains
tax liability. If that liability was compensatable at all, it could only be
under the second limb of r 6 of section 5 of the Land Compensation Act 1961.
However, as a matter of law, the claimant was not entitled to recover
compensation for the liability under r 6 of section 5 because the tax liability
was a matter directly based on the value of land. In any event the claim would
have failed on grounds of causation and remoteness.
The following cases are referred to in this
report.
Alfred Golightly & Sons Ltd v Durham County Council [1981] 2 EGLR 190; (1981) 260 EG
1045, 1135 and 1199
Bresgall & Sons Ltd v Hackney London Borough Council (1976) 32 P&CR 442;
[1976] 1 EGLR 199; (1976) 238 EG 577
Clarke and Wandsworth District Board of
Works, Re (1868) 17 LT 549
DB Thomas & Son Ltd v Greater London Council [1982] 1 EGLR 197; (1982) 262 EG
991 & 1086
Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111; [1995] 2 WLR 404;
[1995] 1 All ER 846; [1995] 1 EGLR 19; [1995] 19 EG 147; [1995] RVR 124, PC
Emslie & Simpson Ltd v Aberdeen City District Council [1994] 1 EGLR 33; [1994] 18
EG 136
Harvey v Crawley
Development Corporation [1957] 1 QB 485; [1957] 2 WLR 332; [1957] 1 All ER
504; (1957) 55 LGR 104; 8 P&CR 141, CA
Horn v Sunderland
Corporation [1941] 2 KB 26; [1941] 1 All ER 480; 39 LGR 367, CA
J Bibby & Sons Ltd v Merseyside County Council (1979) 39 P&CR 53; [1979] 2
EGLR 14; 251 EG 757, CA
Jubb v Hull
Dock Co [1846] 9 QB 443
Kilworth Rifle Range, Re [1899] 2 IrR 305
Liesbosch Dredger
v SS Edison [1933] AC 449
Lowes v Clarke
Whitehill unreported 21 November 1997
Mallick v Liverpool
City Council [1999] 2 EGLR 7; [1999] 33 EG 77
R v Poulter
(1887) 20 QBD 132
Rush &
Tompkins Ltd v Greater London Council [1989] AC 1280; [1988] 3 WLR
939; [1988] 3 All ER 737
Service Welding Ltd v Tyne and Wear County Council (1979) 38 P&CR 352; 77
LGR 646; [1979] 1 EGLR 36; (1979) 250 EG 1291; [1979] JPL 612, CA
Simpson v Stoke-on-Trent
City Council (1982) 44 P&CR 226; [1982] 1 EGLR 195; (1982) 263 EG 673;
[1982] JPL 454
Smith v
Birmingham Corporation (1974) 29 P&CR 265
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd [1973] QB 27; [1972] 3
WLR 502; [1972] 3 All ER 557, CA
Stoke-on-Trent City Council v Wood Mitchell & Co Ltd [1980] 1 WLR 254; [1979] 2 All
ER 65; [1978] 2 EGLR 21; (1978) 248 EG 870; [1979] JPL 230 sub nom Wood
Mitchell & Co Ltd v Stoke-on-Trent City Council (1978) P&CR 126
Taylor v O’Connor
[1971] AC 115; [1970] 2 WLR 472; [1970] 1 All ER 365
Tynemouth Corporation and the Duke of
Northumberland, Re (1903) 89 LT 557
Wrexham Maelor Borough Council v Macdougall [1993] 2 EGLR 23; [1993] 49 EG 115; [1993] RVR
141
Geraint Jones (instructed by Randalls, of
Bridgend) appeared for the claimant; Milwyn Jarman (instructed by the solicitor
to the Welsh Development Agency) represented the acquiring authority.
Giving the decision of the tribunal, MR PETER H CLARKE FRICS said: This
is a reference to determine the compensation payable for the compulsory
acquisition of a commercial property in Caerphilly, partly occupied by the
claimant for his business as an optician.
Mr Geraint Jones, of counsel, appeared for the
claimant and called: Mr David E Holland BSc FRICS IRRV, partner of David E
Holland, chartered surveyors of Cardiff; the claimant, Mr John Henry Harris BSc
FBCO; and Mr Alan Edward Davis FCCA, partner of Zeidman and Davis, certified
accountants of Caerphilly.
Mr Milwyn Jarman of counsel appeared for the
compensating authority and called Mr Anthony Kevin Jones CPFA FCCA, resources
director of the Land Division of the Welsh Development Agency and formerly
financial controller for the Land Authority for Wales; Ms Claire Evans BSC
ARICS, partner of Burnett Davies, property consultants and valuers of Llandaff,
Cardiff, formerly an associate of Brinsons, chartered surveyors and estate
agents of Caerphilly; and Mr Trevor A Isaac BSc ARICS, commercial manager of
Brinsons since November 1993.
Following the hearing I made an accompanied
inspection of 93 Cardiff Road, Caerphilly, the premises into which the claimant
has relocated his business, and an unaccompanied inspection of the town centre
of Caerphilly. I was unable to inspect 60-60A Castle Street, which has been
demolished.
I heard all the evidence at a hearing in Merthyr
Tydfil in July and, by agreement with the parties, I received counsels’ closing
submissions in writing in August.
Facts
The parties prepared a brief statement of agreed
facts, and from this statement and the additional facts agreed during the
hearing, and the evidence, I find the following facts.
On 7 April 1989 the Land Authority for Wales made
the Land Authority for Wales (Castle Park Redevelopment, Caerphilly) Compulsory
Purchase Order 1989, which was confirmed on 23 August 1990. Plots 17 and 18 in
this order are 60-60A Castle Street, owned by the claimant. The Land Authority
for Wales acquired this property using the general vesting declaration
procedure and were deemed to have taken possession on 3 January 1992. This is
the agreed date of valuation. Actual possession was taken on 17 August 1992.
The Land Authority for Wales are now the Welsh
Development Agency and I refer to both these bodies as "the
authority".
60-60A Castle Street was situated in a secondary
shopping location in the centre of Caerphilly opposite the castle. It was a
three-storey, mid-terrace property constructed of brick with a slate roof. The
claimant occupied the ground and second floors and attic of number 60 for his
business as an optician, trading as Lawrence & Harris. 60A Castle Street
(part ground floor, first and second floors) was occupied by Charles Crookes
& Jones, solicitors, on a 15-year lease granted in February 1981. A rear
garage was occupied by JK Motors, motor mechanics.
The ground floor occupied by the claimant
comprised a reception area, display area containing a private consultation and
dispensing section, three consulting rooms, store, workshop, kitchen, toilet,
waiting area and separate lobby. The accommodation was ventilated with
additional air-circulating fans in the display and waiting area. The accommodation
included a small play area for children and facilities for the disabled. The
agreed floor area of the ground floor was 1,055 sq ft. The second floor
occupied by the claimant comprised three offices, two stores, kitchen and
toilet. On a flat roof was a lock-up shed used as a store. The agreed floor
area of the second floor was 445 sq ft. The claimant used the attic for the
storage of old records and books. The total floor area occupied by the claimant
on ground and second floors was 1,500 sq ft.
The freehold of 60-60A Castle Street was owned by
the claimant. He occupied part for his business as an optician and let number
60A and the rear garage. The parties agree that this property has never
appeared in the balance sheet of the claimant’s business and has been treated
by the claimant’s accountant as an investment property.
On the disposal of the freehold interest in 60-60A
Castle Street to the authority under the above compulsory purchase order, Mr
Harris incurred an agreed capital gains tax liability of £32,524.80 based on a
chargeable gain of £86,812.
The practice of Lawrence & Harris was
established at 89 Cardiff Road, Caerphilly in 1953 and moved to 60 Castle
Street in 1965. Mr Harris, the claimant, joined the practice in 1969. By 1989
he owned the freehold of 60-60A Castle Street and was sole proprietor of the
business. On 15 August 1992 the business closed at 60 Castle Street and
reopened at 93 Cardiff Road on 17 August 1992.
93 Cardiff Road is situated in a secondary
shopping position in the town centre of Caerphilly opposite the railway
station. Before works of extension and alteration were carried out by the
claimant it comprised a mid-terrace house with accommodation on ground and
first floors with a small front garden. The ground floor had been adapted for
use as a dancing school and, later, a nursery. It comprised entrance porch, a
large front room, kitchen, store and two toilets. At the rear was a patio,
garden and two lock-up garages. The agreed floor area of the ground floor was
899 sq ft.
Mr Harris carried out extensive works to the
ground floor of 93 Cardiff Road to make it suitable for his business, comprising
the construction of a single-storey extension of 611 sq ft over the garden at
the front of the property and internal alterations. The ground floor now
comprises: entrance porch, reception, waiting area with display and fitting
arm, fitting area, three consulting rooms, corridor, office, kitchen, workshop
and toilets. At the rear is a patio, car park and access to the garden and
first floor residential accommodation occupied by the owner of the property.
The agreed floor area of the ground floor following extension and alteration is
1,510 sq ft. The agreed cost of the works for the purpose of assessing
compensation is £49,478. In addition, the claimant is seeking compensation of
£7,911.61 for fees and the costs of a bridging loan of £6,222.01.
Under a lease dated 24 March 1992, granted by
Selwin and June Jones (landlords), the ground floor of 93 Cardiff Road,
described as "ground floor lock-up shop, car park and forecourt", was
let to the claimant on full repairing and insuring terms for 10 years from 24
March 1992 at an initial rent of £13,000 pa, with a rent review at the fifth
year of the term to the "full rental value", excluding, inter alia,
any increase in rental value attributable to tenant’s improvements. The
permitted user is as a shop for the purposes of an optician or any other use
under classes A1 or A2 of the Town and Country Planning (Use Classes) Order
1987.
The lease contains a personal option to Mr Harris
to purchase the whole of 93 Cardiff Road at the open market value, exercisable
by written notice given not more than 12 months nor less than six months before
the expiration of the term in March 2002.
Under a separate agreement dated 24 March 1992
between the same parties as the lease, Mr and Mrs Jones have the option to
require the claimant to buy 93 Cardiff Road at market value by service of
written notice at any time during the period of 10 years from 24 March 1992, ie
during the term of the above lease. The claimant may, however, serve a
counternotice within three months stating that he does not wish to purchase the
property. The claimant’s option to purchase under the lease cannot be exercised
if Mr and Mrs Jones have exercised their option under the separate agreement
and Mr Harris has served a counternotice indicating his unwillingness to buy.
In both options the purchase price is to be
determined, in the absence of the agreement, by an independent expert.
The ground floor of 93 Cardiff Road was originally
entered in the 1995 rating list at £18,250 rateable value, reduced to £17,250
rateable
December 1997, also with effect from 1 April 1995.
On 5 August 1997 the claimant referred to this
tribunal the determination of compensation for the compulsory acquisition of
60-60A Castle Street, Caerphilly.
On 20 November 1992 and 28 July 1993 advance
payments of compensation (adjusted for rent) were made to the claimant of
£302,664.03 and £8,668 respectively. The parties agree that these payments, if
invested, would provide investment income of at least £10,000 pa.
The parties have agreed that the summary of
accounts relating to the claimant’s business, included in the evidence given by
Mr Alan E Davis, is an accurate record and forms the basis to consider the
claim for loss of profits for the years 1992-1994.
During the hearing, the claimant confirmed that he
accepted the price of £275,000 for the acquisition of his freehold interest in
60-60A Castle Street. He had accepted this figure in his own mind in August or
September 1992 but this was not communicated to the authority.
Compensation for items of disturbance has been
agreed in the sum of £65,804.86.
Issues
There are four heads of compensation still in
dispute:
1. for the cost of the extension and alterations
at 93 Cardiff Road (claimant £37,368.62, authority nil or £7,895);
2. for the claimant’s time (claimant £39,375,
authority £8,300);
3. for loss of profits (claimant £54,363,
authority nil);
4. for the capital gains tax paid on the disposal
of 60-60A Castle Street (claimant £32,524.80, authority nil).
I now consider each head of claim.
Extension and
alteration of 93 Cardiff Road
Claimant’s case
The claim under this head is £37,368.62,
representing the agreed cost of the alteration and extension (£49,478) plus
fees (£7,911.61) and costs of a bank bridging loan (£6,222.01), less value for
money in the form of the premium value for the assignment of the lease of the
improved property (£26,243).
Evidence
Mr Harris referred to the establishment and
development of the practice at 60 Castle Street and said that this
accommodation was necessary to administer a large practice and branch practices
in Ystradmynach and Abertridwr and other optimetric business interests. Plans
had been prepared for a further extension to the ground floor when the
compulsory purchase was initiated.
Mr Harris said that once it was clear that he
would need new accommodation, he had the following criteria to be satisfied.
The new premises needed to be of comparable size with a ground floor of 1,250
sq ft and potential for expansion. Ideally, the location would again be
secondary with affordable overheads. The premises needed to be close to the
town centre with parking and public transport nearby and easy access for the
young, elderly and disabled. To mitigate his capital gains tax liability,
freehold premises were required.
Many difficulties were encountered in seeking
alternative premises. These included: uncertainty due to vacillation by the
authority, shortage of accommodation within the town centre (made worse by the
authority’s acquisition and demolition programme), the increase in values due
to demand from displaced businesses, the absence of a reasonable freehold
valuation of number 60-60A from the authority, leading to difficulties in
financing alternative accommodation, and the dwindling of the purchasing power
of the practice as profitability fell due to blight.
Throughout the acquisition period there was an
increase in crime, arson and infestational health hazards as properties surrounding
number 60-60A were vacated.
By 1991 Mr Harris was forced to consider
alternative schemes, including contraction of the business by moving out of the
town centre, amalgamation and extinguishment. These were unacceptable. Mr
Harris decided to continue to practise at number 60 until alternative premises
were found or the property was acquired.
Mr Harris instructed four surveyors to assist in
his search for new premises and to represent him in the compulsory purchase
negotiations. All local firms and major agents in Cardiff and Newport were
contacted and Brinsons, in Caerphilly, representing the authority, provided
details of available properties. 25 Windsor Street was considered but a
purchase of the freehold could not be negotiated. In 1988-1989 and 1990-91 the
viability of creating new premises was explored. A partnership to redevelop
Manchester House and Brooks Yard was considered. Mr Harris explored the
possibility of acquiring a residential property and an offer was made to
purchase 6-7 Market Street but the owners declined to sell. Between 1989 and
1991 Mr Harris considered leasehold premises at 23, 30 and 68-70 Cardiff Road
and Plymouth Cafe. Early in 1991 he considered premises at Eastgate and 8
Market Street. For various reasons none of these properties was suitable or
could be bought or leased. At this stage it appeared that the available options
were to move to less suitable accommodation in a prime location in Cardiff Road
or to a secondary location in Market Street.
In June 1991 the ground floor of 93 Cardiff Road
became available on lease. Brinsons acted for the owners and negotiated a rent
of £13,000 pa. Mr Harris wished to buy the freehold and his then agent made
written offers on 8 July 1991 of £150,000 for the freehold with vacant possession,
or £120,000, allowing the owners to occupy the first-floor flat rent-free on a
life tenancy. These offers were not accepted. During the negotiations to buy
number 93, residential properties in North View and at 23 Cardiff Road were
considered. Relocation in the Castle Park redevelopment was considered.
In February 1992 the authority required immediate
possession of 60-60A Castle Street and Mr Harris had no alternative but to take
a lease of 93 Cardiff Road. He had instructed his solicitor in September 1991
and the lease and option took effect from March 1992. Mr Harris said that, of
the alternative premises considered, only 93 Cardiff Road provided the
potential to mirror the facilities at 60 Castle Street and to mitigate any
losses encountered by the enforced relocation. He would have preferred to buy
the freehold of number 93 but the owners were unwilling to sell. He has been
advised to buy the freehold and it is likely that he will exercise his option
to purchase in 2001. The money is available.
The works of extension and alteration at 93
Cardiff Road started immediately after the lease was granted. Mr Harris
considered that he could provide 1,700 sq ft by building an extension over the
front garden. This provides adequate frontage to maintain the highly visible
profile of the practice. There is scope for expansion at the rear. The existing
building was refurbished to bring it up to the standard of 60 Castle Street.
Plans of the proposed works were submitted to Brinsons, as agents for the
authority, before a final plan was adopted. It cannot be said that the final
plan came as a surprise to them. Communication with the authority was poor
during and after the period of acquisition. Three estimates for the works were
obtained. It was agreed by the authority’s agents that the contract should be
offered to Bedwas Weathershield.
Although 93 Cardiff Road is appropriate for
relocation it has disadvantages, including lack of office and storage space.
The move to these premises has been successful and has not hampered the
development of the practice, which continues with a similar management style
and marketing methods.
Following relocation on 17 August 1992, a schedule
of invoices was sent to the authority. The release of accounts has been a
contentious issue. Although the authority formally recognised Mr Harris’
concern and request for confidentiality, it was not until 12 September 1996
that the authority supplied a contact name. Within three months the authority
had all the financial details of the business.
Mr Harris said that there is no element of
betterment in his claim. He does not consider that the extension to number 93
is excessive in the light of his previous premises. The claim under this head
includes the costs of a bridging loan. In cross-examination it was put to Mr
Harris
November 1991, and, if this offer had been accepted, it would not have been
necessary for Mr Harris to take out a bridging loan. Furthermore, Mr Harris
could have made a request for an advance payment of compensation. Mr Harris
said that he received three offers for 60-60A Castle Street and was awaiting a
higher offer. He was advised by his surveyor that acceptance of advance
compensation would indicate acceptance of the price of £275,000. Mr Harris
received approximately £310,000 in advance compensation. He said that he
invested most of this in a building society and in PEPs and TESSAs and used
£48,000 to buy a holiday flat at Saundersfoot. He wished to keep this money
liquid in order to acquire the freehold of 93 Cardiff Road under the option.
Mr Holland was instructed in April 1994. His
office is in Cardiff and he has limited experience of shops in Caerphilly. He
mainly gave evidence of the value of Mr Harris’ lease of 93 Cardiff Road, if he
had wished to assign it on completion of the works. This represented the value
for money element in the claim.
Mr Holland calculated the premium to be £26,243.
He assessed the rental value of 93 Cardiff Road after completion of the works
at £16,590 pa, based on £16.50 per sq ft zone A. He arrived at this figure by
reference to the rent of £13,000 pa, which he devalued to £16.50 per sq ft zone
A and considered it to be the best evidence of rental value, and comparables
obtained from Brinsons at 80, 93a, and 95b Cardiff Road and 1 Bartlett Street.
These devalued to between £13 and £14.78 per sq ft. He rejected the rateable
value of number 93 as reliable evidence of rental value. Mr Holland deducted
the rent from the rental value to produce a profit rent of £3,590 pa, which
represented the rental value of the improvements. He then capitalised this
figure for 21 years to give a premium of £26,243. Mr Holland used 21 years
because the value of tenant’s improvements is excluded from the rent on renewal
under the Landlord and Tenant Act 1954 for up to this period. Mr Holland said
that, in using 21 years and not the 10-year term held by Mr Harris, he is
following market practice.
Mr Holland said that it is his interpretation of a
telephone conversation with Mr R Brinson, acting for the authority, on 12
September 1994 that the authority will not dispute the claimant’s choice of
replacement premises at 93 Cardiff Road as appropriate in the circumstances. Mr
Holland confirmed this by a letter dated 13 September 1994. There was no reply.
The claimant was obliged to take a lease of number 93 because no other suitable
premises were available. Although not instructed during Mr Harris’ search for
alternative premises, Mr Holland is of the opinion that the action taken by Mr
Harris was justified as being necessary to create practice accommodation to the
clinical and commercial standards demanded by the practice.
Submissions
Mr Geraint Jones said that there is a presumption
that the claimant has had value for money for his expenditure and that the onus
is on him to rebut that presumption. He can seek to rebut the presumption in
whole or in part and, if he does so, then the cost of the works is recoverable
as compensation to the extent that he has not had value for money: Service
Welding Ltd v Tyne and Wear County Council (1979) 38 P&CR 352* per
Bridge LJ at pp357-358. Mr Milwyn Jarman’s reference to part of the judgment of
Templeman LJ is misleading. He was not disagreeing with the formulation of
principle by Bridge LJ but stating the obvious, namely that if the claimant has
received value for money, then the same amount cannot be part of the claim for
disturbance.
*Editor’s note: Also reported at [1979] 1 EGLR
36; (1979) 250 EG 1291
Mr Harris has not had value for money: he has
rebutted the presumption and can have the sum claimed as part of his land
compensation claim. He is not seeking to claim the relevant sum as part of his
disturbance claim. These are separate and distinct issues.
The authority have blandly asserted that Mr Harris
has had value for money. They then seem to assert that whether or not Mr Harris
could have taken other premises bears upon this issue. This is illogical. The
value for money point is a discrete issue and arises provided the authority
have been unable to establish that Mr Harris could or should have relocated
elsewhere.
The authority’s case is that the claimant has had
value for money but they have also put forward a lower premium calculated by Mr
Isaac. This is illogical. Mr Isaac’s premium, being less than the cost of the
works, shows that the claimant has not had value for money for the whole of the
expenditure. The logic of this approach is that it is accepted that, as a
matter of law, the correct approach to ascertaining whether Mr Harris has
received value for money is to deduct the premium value from the cost of the
works. No other approach to the value for money calculation has been put
forward by the authority. It is not now open to them to say that this approach
should not be adopted. It is rare for the market value of a property to rise in
line with the cost of alterations. The authority have not asked the question:
by what sum was the premium realisable for the leasehold interest increased by
reason of the extension and alterations? That sum is then deducted from the
cost of the works to produce the claim figure.
Mr Jarman’s submission that Mr Harris’ business
was growing and that the accommodation at 93 Cardiff Road is better than that
at 60 Castle Street confuses any effect of relocation on profits with capital
value.
As to the cost of financing the works, Mr Jones
said that there was still a finance cost whether the sum was borrowed or
withdrawn from an investment account. It is a matter for the tribunal to decide
whether the bridging loan costs should remain undisturbed or some lesser sum
substituted.
With regard to alternative premises for
relocation, the authority argue that the value for money issue should not arise
because Mr Harris should have taken other premises that would not have needed
extensive works. The authority have not identified those other premises and
have not carried out comparative cost analyses. The evidential burden is on the
authority to prove that it would have been cheaper for Mr Harris to relocate
elsewhere. This is essentially a matter for the claimant. Where he acts
reasonably it is not for the authority to say that he should have taken other
premises.
This matter can, however, be taken further due to
the evidence of Mr Holland that the authority through Mr Brinson confirmed that
they would not take issue as to the reasonableness of the claimant’s relocation
to 93 Cardiff Road. No evidence was called from Mr Brinson. Mr Holland’s
evidence on this matter is admissible. There is no suggestion that his
telephone conversation and letter formed part of without prejudice discussions.
Even if they had, once agreement is reached the without prejudice
correspondence or conversation can be relied upon to prove the fact of the
agreement reached: Rush & Tompkins Ltd v Greater London Council
[1988] 3 WLR 939.
Mr Jones said that if he is right in his
submissions regarding value for money, then the question of the option is
irrelevant. It is personal to Mr Harris. It does not enhance the value of the
leasehold interest and therefore the premium. Mr Harris might or might not
exercise it. If he does exercise it he will have to pay market value. The
option is not marketable and cannot impact on any heads of claim. Neither Mr
Isaac nor Mr Jones put a value on the option. It has no market value.
The authority argue that the effect of section 1
of the Landlord and Tenant Act 1927 is that the claimant cannot recover
compulsory purchase compensation for improvements in respect of which he may
recover compensation under that Act. This is disingenuous. The authority put
their case on the basis that Mr Harris would probably buy the freehold. If he
does so, no claim can arise under the 1927 Act.
As a matter of law and fact, Mr Harris has
established that he is entitled to compensation for the works carried out at 93
Cardiff Road because he reasonably relocated to this property, reasonably
extended and altered it to replicate the space at 60 Castle Street and has not
had full value for money in respect of the cost of the works.
Authority’s case
Evidence
Mr Isaac said that the agents for the parties
provisionally agreed the value of 60-60A Castle Street at £275,000 late in 1991,
but no formal confirmation was ever received from the claimant. He put in
evidence a valuation at this figure. This resulted in a delay in the payment of
compensation to September and November 1992. The authority would like it to be
known that, had confirmation of the price been received earlier that year when
requested, then payment would have been made earlier. This would have avoided
the need for a bridging loan.
In December 1994 Brinsons, in their capacity as
agents for the authority, were informed by the claimant’s surveyor that he was
unable to progress matters until he received further instructions. It was not
until May 1996 that Brinsons were given authorisation by the claimant to check
invoices etc to corroborate his claim.
Mr Isaac said that it is the authority’s
contention that the cost of the works at 93 Cardiff Road is not compensatable
as it constitutes value for money. This principle has not been rebutted by the
claimant. In answer to a question from me, Mr Isaac said that he has not made
his own calculation or check as to whether the claimant received value for
money for the works carried out at number 93. He has prepared his evidence on
the assumption, given to him by the authority, that Mr Harris has received
value for money. However, if he did not receive value for money then his
compensation should be £7,895 compared to the claim figure of £37,368.62. The
reasons for the difference between these two figures are that Mr Isaac assesses
the premium value of the improved property at £43,494.50 (compared to Mr
Holland’s figure of £26,243); he has deducted 10% of the cost for betterment;
he has excluded the cost of the bank bridging loan; and he has deducted value
added tax from the fees.
As to Mr Isaac’s premium, he assessed the rental
value of 93 Cardiff Road (as improved) at £18,950 pa, producing a profit rent
or balance of rental value due to improvements of £5,950, which he capitalised
for 21 years. His rental value was based on £18 per sq ft zone A. Mr Isaac
supported this figure by reference to the rateable value of £18,250, the rent
of £13,000 pa unimproved (which should be increased to reflect the value of the
improvements), and four comparables (76B and 91 Cardiff Road, 1 Station Terrace
and 1 Bartlett Street). Mr Isaac analysed these comparables to produce rental
values zone A of between £21.73 and £25.80 per sq ft. He relied particularly on
91 Cardiff Road (£23.29 per sq ft).
Mr Isaac said that the authority dispute the
claimant’s choice of replacement premises at 93 Cardiff Road. It is their
opinion that the claimant was probably too selective in his choice of premises
and discounted a number of properties that may well have afforded alternative
accommodation, eg 68-70 Cardiff Road and part of the development at Eastgate,
Market Street. The extent of the work required to 93 Cardiff Road shows that
the property in its original form did not provide suitable accommodation. Mr
Isaac did not make any comparative analyses of other properties that might have
been suitable.
Mr Isaac said that Mr Harris has profited from
relocation by providing himself with larger and extensively refurbished
premises. He has also promoted and relaunched his business. In 60 Castle Street
Mr Harris had accommodation on two floors, which was not fully used. At 93
Cardiff Road all the accommodation is on the ground floor. The quality of this
accommodation is better than 60 Castle Street. A smaller and cheaper front
extension was originally proposed. Mr Harris has failed to mitigate his loss.
Mrs Evans gave evidence of fact relating to the
period from 1987 to 1993, when she was employed by Brinsons and dealt with the
negotiations on Mr Harris’ claim.
Mrs Evans said that the claimant was not obliged
to take a lease of 93 Cardiff Road; other suitable properties were available.
All properties marketed in Caerphilly by Brinsons were brought to the notice of
Mr Harris. 68-70 Cardiff Road and Eastgate were available properties with
similar accommodation to 60 Castle Street, but no offers were made by the
claimant. The accommodation on the second floor at number 60 could have been
provided in separate premises. It was not reasonable for the claimant to seek
more ground-floor space than he had at 60 Castle Street. The property in
Eastgate had a ground floor comparable in size to number 60, and the overall
accommodation provided room for expansion. The location was acceptable. The
asking rent was £20,000 pa. Mrs Evans did not recall any offer or serious
consideration being given to this property by the claimant.
Negotiations with Mr Harris were severely hampered
by continuous changes of agents and lack of information. No agreement was made
to accept any of the quotations for works at 93 Cardiff Road. At an early stage
reservations were made regarding the eligibility for compensation for the
extension. An offer of £275,000 for the freehold of 60 Castle Street was made
in November 1991 and many chasing letters were sent, but no reply was received
from Mr Harris or his agents. Mrs Evans made the request to the authority for an
advance payment of compensation on 2 September 1992.
Submissions
Mr Jarman said that the authority’s primary case
is that no sum is payable under this head. Mr Harris chose to relocate in what
was essentially a dwelling-house and converted it into modern shop premises.
There is a presumption that in doing so he obtained value for money. The
claimant accepts that the onus is on him to rebut that presumption. Mr Jarman
referred to Service Welding, particularly Templeman LJ at p359.
The claimant says that there was no alternative to
taking a lease of 93 Cardiff Road. This is contrary to the evidence of Mrs
Evans and Mr Isaac, which was that there were other suitable properties
available, particularly 68-70 Cardiff Road and Eastgate. These were shops not a
house. There was no evidence of any particular clinical requirements for
accommodation for an optician.
Even in the absence of alternative premises it is
still necessary for the claimant to show that he did not receive value for
money. There were three schemes of works and Mr Harris chose the scheme that
gave value for money.
The method used by the claimant to demonstrate a
lack of value for money is artificial and inappropriate. He did not acquire the
premises as a speculative venture or to sell on, but to carry on his business
with the intention of extending and adapting the premises for such business and
negotiating an option to purchase. The business was in a state of growth and
the new premises are bigger and better than 60 Castle Street. The claimant has
had the benefit of the works, which is reflected in increased profits.
Mr Holland’s calculation does not take into
account the increased profitability of 93 Cardiff Road nor the potential claim
under section 1 of the Landlord and Tenant Act 1927. He referred to Bresgall
& Sons Ltd v Hackney London Borough Council (1976) 32 P&CR
442*. Mr Holland has taken no account of the option that will enable Mr Harris
to buy the freehold in 2001. He has accepted that he is likely to do so.
*Editor’s note: Also reported at [1976] 1 EGLR
199; (1976) 238 EG 577
The authority’s secondary case is that, if Mr
Holland’s method of calculating the claim is acceptable, then the correct sum
is £7,895 as calculated by Mr Isaac. If an application for advance compensation
had been made, Mr Harris would not have needed a bridging loan. It is therefore
unreasonable to add these charges to the cost of the works. He referred to Simpson
v Stoke-on-Trent City Council (1982) 44 P&CR 226†. No alternative
claim has been made for the loss of the use of his money if the claim for
bridging loan charges is disallowed.
†Editor’s note: Also reported at [1982] 1 EGLR
195; (1982) 263 EG 673
Decision
It is important to establish at the outset the
head of compensation under which this claim arises. This determines the
underlying principles of assessment and is essential to a proper understanding
of the claim. Usually it is common ground that the cost of works to new
premises falls under the head of disturbance. Mr Jones, however, submits that
Mr Harris can have the sum claimed as part of his land compensation
claim and that he is not seeking the relevant sum as part of his disturbance
claim. I must deal with this submission before I consider the merits of the
claim.
As a matter of law, statutory compensation for
land taken falls into two categories: compensation for land taken and, where
part only is taken, for severance and injurious affection. This position arises
out of the historical development of the law of compensation and the Lands
Clauses Consolidation Act 1845. In Horn v Sunderland Corporation
[1941] 2 KB 26 Scott LJ referred to the 1845 Act and said at p42:
That Act was a consolidation of standard clauses
usually inserted in private Acts, as appears from its title and preamble. It
possesses two leading features. The first is that what it gives to the owner
compelled to sell is compensation – the right 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 the right to receive a money payment not less than the loss
imposed on him in the public interest, but, on the other hand, no greater. The
other is that the legislation recognizes only two kinds or categories of
compensation to the owner from whom land is taken: (1) the fair value to him of
the land taken, and (2) the fair equivalent in money of the damage sustained by
him in respect of other lands of his, held with the lands taken, by reason of
severance or injurious affection. For compulsory acquisition those are the only
two kinds of statutory compensation.
Later he said at p49:
on a compulsory sale the principle of compensation
will include in the price of the land, not only its market value, but also
personal loss imposed on the owner by the forced sale, whether it be the cost
of preparing the land for the best market then available, or incidental loss in
connection with the business he has been carrying on, or the cost of
reinstatement, because otherwise he will not be fully compensated.
This personal loss disturbance was the creation of
the courts, found by "the judicial eye" in the value of the land
taken. It is preserved by r 6 of section 5 of the Land Compensation Act 1961
(the 1961 Act). The statutory basis of compensation is now in section 7 of the
Compulsory Purchase Act 1965 and the rules of assessment are in section 5 of
the 1961 Act.
Mr Jones is therefore right, as a matter of law,
in calling the claim for the cost of works to 93 Cardiff Road part of the land
compensation claim. The only justification for this claim is that it forms part
of the compensation for the land taken (60-60A Castle Street). Before 1919 this
would have been assessed on the basis of value to the owner and would have
included all the losses imposed on him by his expulsion from the property: see Jubb
v Hull Dock Co [1846] 9 QB 443. Now the measure of compensation for land
taken is value in the open market under r 2 of section 5 of the 1961 Act and
the right to recover disturbance (to make up value to the owner) is preserved
by r 6: "the provisions of rule (2) shall not affect the assessment of
compensation for disturbance or any other matter not directly based on the
value of land". In Director of Buildings and Lands v Shun Fung
Ironworks Ltd [1995] 2 AC 111* Lord Nicholls said at p125H:
In practice it is customary and convenient to
assess the value of the land and the disturbance loss separately, but strictly
in law these are no more than two inseparable elements of a single whole in
that together they make up the value of the land to the owner: see Hughes
v Doncaster Metropolitan Borough Council [1991] 1 AC 382, per Lord
Bridge of Harwich at page 392.
*Editor’s note: Also reported at [1995] 1 EGLR
19; [1995] 19 EG 147
The true position is therefore that Mr Harris is
entitled to compensation for the market value of his freehold interest in
60-60A Castle Street, which has now been agreed at £275,000, plus compensation
for disturbance, ie the personal loss caused by his dispossession from this
property and relocation at 93 Cardiff Road. Although, strictly speaking, both
heads of compensation are in respect of the land taken, they are assessed
separately and by reference to different measures of compensation and
principles of assessment. Compensation for the freehold interest in 60-60A
Castle Street is market value; compensation for disturbance is similar to
damages in tort and is assessed by reference to principles such as causation,
mitigation and remoteness of loss. It follows from the above review of the law
that I cannot accept Mr Jones’ submission that this head of claim does not form
part of Mr Harris’ disturbance claim but is part of his land compensation
claim. It can only be assessed as disturbance compensation and not as part of
the claim for the land taken (except in so far as the whole of the compensation
in this reference is, as a matter of law, within the ambit of compensation for
land taken), which has been agreed at £275,000 and is not one of the issues for
my determination.
The classic statements of the scope of disturbance
compensation are in Harvey v Crawley Development Corporation
[1957] 1 QB 485. Denning LJ said at p492:
[The claimant] is entitled to "compensation
for disturbance", which is specifically preserved…, and includes all
damage directly consequent on the taking of the house under statutory powers.
Romer LJ said at p494:
It seems to me that the authorities to which our
attention was drawn do establish that any loss sustained by a dispossessed
owner (at all events one who occupies his house) which flows from a compulsory
acquisition may properly be regarded as the subject of compensation for
disturbance, provided, first, that it is not too remote and, secondly, that it
is the natural and reasonable consequence of the dispossession of the owner.
In Shun Fung Lord Nicholls said at p126A:
The application of the general principle of fair
and adequate compensation bristles with problems. As useful guidelines there
are three conditions which must be satisfied. First, it goes without saying
that a prerequisite to an award of compensation is that there must be a causal
connection between the resumption or acquisition and the loss in question…
The adverse consequences to a claimant whose land
is taken may extend outwards and onwards a very long way, but fairness does not
require that the acquiring authority shall be responsible ad infinitum. There
is a need to distinguish between adverse consequences which trigger a claim for
compensation and those which do not. A similar problem exists with claims for
damages in other fields. The law describes losses which are irrecoverable for
this reason as too remote…
The familiar and perennial difficulty lies in
attempting to formulate clear practical guidance on the criteria by which
remoteness is to be judged in the infinitely different sets of circumstances
which arise. The overriding principle of fairness is comprehensive, but it
suffers from the drawback of being imprecise, even vague, in practical terms.
The tools used by lawyers are concepts of chains of causation and intervening
events and the like. Reasonably foreseeable, not unlikely, probable, natural
are among the descriptions which are or have been used in particular contexts.
Even the much maligned epithet "direct" may still have its uses as a
limiting factor in some situations…
Suffice to say as a matter of general principle,
to qualify for compensation the loss must not be too remote. That is the second
condition.
Fairness requires that claims for compensation
should satisfy a further, third condition in all cases. The law expects those
who claim recompense to behave reasonably… Expressed in other words, losses
or expenditure incurred unreasonably cannot sensibly be said to be caused by,
or be the consequence of, or be due to the resumption.
I will now consider the claim for the cost of
works in the light of the above principles of disturbance compensation and the
fundamental principle of equivalence. This is referred to several times in the
judgment of Scott LJ in Horn and was restated as "fair
compensation" in Shun Fung, where Lord Nicholls, after referring to
the relevant statutory provisions, said at p125C:
The purpose of these provisions… is to provide
fair compensation for a claimant whose land has been compulsorily taken from
him. This is sometimes described as the principle of equivalence… 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 claimant
is not entitled to receive more than fair compensation: 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.
I look now at the authorities dealing with this
type of claim. I was referred to the decision of the Court of Appeal in Service
Welding Ltd v Tyne and Wear County Council. In this case the
claimant sold its factory in Newcastle to the acquiring authority on the terms
of a notional compulsory acquisition. It sought alternative premises. It was
unable to find a property ready for occupation but found a site for the
erection of a new factory. The finance was provided by the claimant’s bank.
Upon completion of this factory the claimant handed over the old one to the authority.
Compensation for the market value of the factory acquired and miscellaneous
disturbance was agreed. The matter in issue was bank interest and charges for
financing the capital progressively laid out on the site. This was awarded by
the Lands Tribunal and the authority successfully appealed.
Bridge LJ, after referring to the principles on
which compensation is assessed and rr 2 and 6 of section 5 of the 1961 Act,
said at p357:
It is well established that, in a case governed
by rules (2) and (6), in addition to receiving the value of the property that
is taken from him, a dispossessed owner is entitled to all the costs that
reasonably flow from the fact of his disturbance.
He then cited the well-known passage from the
judgment of Romer LJ in Harvey and continued at p357:
It is clear, however, that where, as here, a
business occupier is in a position to find alternative accommodation in which
to carry on his business and prevent its extinction, he is under a duty to
mitigate his disturbance compensation by removing his business to the
alternative accommodation. What the authorities … very clearly establish,
however, is that when an occupier, whether residential or business, does, in
consequence of disturbance, rehouse himself in alternative accommodation, prima
facie he is not entitled to recover, by way of compensation for disturbance or
otherwise, any part of the purchase price that he pays for the alternative
accommodation to which he removes, whether that accommodation is better or
worse than, or equivalent to, the property from which he is being evicted. The
reason for that is that there is a presumption in law – albeit a rebuttable
presumption – that the purchase price paid for the new premises is something
for which the claimant has received value for money. If he has made a good
bargain and acquired premises that have a value in excess of what he has paid
for them, that is not something for which the acquiring authority is entitled
to any credit. If the claimant has made a bad bargain and has paid a great deal
more for the new premises to which he is moving than they are really worth,
that is not something for which the acquiring authority can properly be
charged.
He concluded at p358:
it seems to me perfectly clear that interest
charges incurred in the circumstances in which the claimants’ interest charges
were incurred here are part of the costs necessarily incurred in producing as
an end-product factory premises ready for occupation as such, where the
intending occupier has built the factory for himself. It seems to me that, in
those circumstances, those charges are properly to be regarded as part of the
purchase price paid by the factory owner for the factory that he has built for
himself.
I observe here that Bridge LJ concentrated in his
judgment on the value for money presumption.
Templeman LJ, agreeing that the appeal should be
allowed, concentrated on the need to avoid double compensation (or the
principle of equivalence). He said at pp359-60:
Under rule (2) of section 5 of the Land Compensation
Act 1961, the claimants became entitled to the amount that the Newcastle
factory, if sold in the open market by a willing seller, might have been
expected to realise. Of course, they cannot have it both ways. If they are
compensated by being paid the value of the Newcastle factory, they cannot be
compensated in addition by being paid part of the price of the new factory.
What they are entitled to, in addition to the value of the land under rule (2),
is the assessment of compensation for disturbance under rule (6), the
compensation, as I understand it, being the costs and losses caused by their
having to get out of the Newcastle factory and get into the new factory. The
claimants, as they were entitled, but not bound, to do, looked around and found
a site, which they acquired, and, as they were entitled, but not bound, to do,
they made arrangements for the site to be developed into a new factory and to
pay the costs of that being done. In the course of so doing, as they were
entitled, but not bound, to do, they paid certain moneys on account, and
borrowed moneys for that purpose. It seems to me that the moneys that they
raised and the interest thereon for which they became liable were not the costs
of being disturbed from the old factory and getting into the new factory; they
were the costs of acquiring the new factory. Accordingly, in my judgement, they
fall neither under rule (2) nor under rule (6), and I would agree with the
order proposed by Bridge LJ.
Megaw LJ agreed with both judgments.
I look now at some of the decisions of the Lands
Tribunal on this issue. In Smith v Birmingham Corporation (1974)
29 P&CR 265 the tribunal rejected a claim for structural alterations and
improvements to freehold premises purchased by the claimant for the relocation
of his business. The member (JR Laird) said at p274:
Under cross-examination Mr Smith admitted that
the money he had spent improving, modernising and extending the buildings at
Deykin Avenue had enhanced the value of his freehold. Mr Law, for the
Corporation submitted that Mr Smith was thus receiving "value for his
money." These last words, by which I am bound, are to be found in the
judgment of Denning LJ as then he was in Harvey v Crawley Development
Corporation where his Lordship observed that if the owner of a house
compulsory acquired "pays a higher price for a new house, he would not get
compensation on that account because he would be presumed to have got value for
his money."
Mr Law drew my attention to the Lands tribunal
decision in the case of M&B Precision Engineering Ltd v London
Borough of Ealing [1973] 13 RVR 81. I find that Mr Smith’s case is very
similar to the M&B case where the following passage taken from that
decision dealt with a claim by M&B in connection with expenditure totalling
some £6,000 on repairing and preparing alternative premises that they had
acquired:
He (Mr Leadbetter [for the Corporation] pointed
out that loss suffered in consequence of a compulsory acquisition could be
compensated if not too remote and if a natural consequence of that acquisition.
It is assumed that the subject property was transferred to the corporation at
market value and the new premises occupied by the company were acquired at
market value. In other words, money’s-worth is deemed to represent deficiencies
in the new premises in comparison with the subject premises, and the cost of
alterations and improvements at the new premises in order to bring it up to the
standards of the old premises is not admissible. These principles are well
established and I therefore disregard the claim for compensation [in items 2,4
and 5 on page 8] which deal with new construction [two stores and renovation of
obsolete sanitary fittings].
Having given this Section Y matter due thought I
agree with Mr Law and with Mr Pepper that the same principles apply in this
reference and that none of the items in Section Y are admissible. Accordingly I
allow nothing for them.
The items in Section Y were: new factory unit, new
steel-framed building, rebuilding of toilets, the provision of mains electricity
to the new buildings, the paving of the yard, architect’s fees and various
fittings and partitioning. The reasons for this decision were both value for
money and the avoidance of double compensation.
In Bresgall & Sons Ltd v Hackney
London Borough Council the claimant moved from a workshop held on lease to
a railway arch, which it also took on lease. It claimed for the adaptation of
the arch, installation of electric lights, installation of WC and erection of
partition. The total claim was £4,409. Counsel for the acquiring authority
submitted that this claim had to satisfy five tests (p446):
It had to be a direct and natural consequence of
the displacement…; it had not to be too remote; it had to be necessary for
the continuance of the particular function of the business; it had not to be
reflected in any other interest – in other words no double compensation; and it
had to be assumed that the price paid for the alternative accommodation
represented market value – in other words that the claimants were getting
money’s worth.
The tribunal (JD Russell-Davis) disallowed
entirely the costs of the works of adaptation and the installation of the WC,
on the grounds of value for money; allowed the cost of three power points on
the grounds of special adaptation; and allowed just over one third of the cost
of partitioning on the grounds that some partitioning was necessary to bring
the new premises up to the standard of the accommodation taken and because it
did not appreciably increase the value of the lease.
It is interesting to note that both parties in
that case called expert evidence that showed that the capital value of the
lease following the completion of the works was less than the cost of the
works. The member said at pp447-8:
Finally, I should say that I am not very
impressed by the "long-stop" valuations put in by Mr Mason and
countered by Mr Sinclair. I think they are unreliable in that they differ
widely, they do not analyse what are and what are not improvements, and neither
valuer appears to place much confidence in them.
Consideration of the above authorities indicates
that a claim for the cost of works to premises into which a claimant has
relocated his business must satisfy four tests:
1. The claimant must have acted reasonably to
mitigate his loss by relocation to the alternative premises. The burden of
proof is on the acquiring authority to show that the claimant has not mitigated
his loss.
2. The expenditure claimed must have been the
natural, direct and reasonable consequence of the claimant’s dispossession from
the land taken and must not be too remote. The burden of proof is on the
claimant.
3. There must be no double compensation, no breach
of the principle of equivalence; the loss claimed must not be included under
another head of claim. The burden of proof is on the claimant.
4. The claimant must not have received value for
money for his expenditure. The claimant must rebut the presumption in law that
he has received value for money.
The first test is that the claimant must have
acted reasonably to mitigate his loss by his relocation to alternative
premises. Here, the burden of proof is on the authority to show that Mr Harris
did not mitigate his loss by his relocation to 93 Cardiff Road.
I find that the authority has not discharged the
burden of proof imposed on them to show that Mr Harris should have taken
different premises and has not mitigated his loss. Many properties for
relocation were suggested by Mr Isaac and Mrs Evans but the evidence, including
that given by Mr Harris in rebuttal, was lacking in precision. The authority
are unable to satisfy me that Mr Harris acted unreasonably in relocating to 93
Cardiff Road, a secondary location similar to that of 60-60A Castle Street on
the other side of the town centre. I should mention here that I do not accept
Mr Jones’ submission that Mr Holland’s telephone call to Mr Brinson and his
subsequent letter stating that Mr Brinson had confirmed that the authority
would not take issue as to the reasonableness of Mr Harris’ relocation to 93 Cardiff
Road constituted an agreement or an admission by the authority. I give no
weight to this evidence, even if it is admissible. In my view, this was a
"without prejudice" exchange in negotiations between surveyors that
did not result in an agreement or admission by the authority.
The second test is that the expenditure claimed
must have been the natural, direct and reasonable consequence of the claimant’s
dispossession from the land taken and not too remote. The burden of proof is on
the claimant.
The claim in respect of the cost of the bank
bridging loan (£6,222.01) can be considered separately. I find this to be
irrecoverable in any event due to the claimant’s failure to mitigate his loss
by not seeking an early advance payment of compensation. The relevant
chronology is as follows. In November 1991 the authority made an offer for
60-60A Castle Street of £275,000, the price eventually agreed. On 3 January
1992 they took deemed possession of this property and Mr Harris could have made
an application for an advance payment of compensation, which would not have
been less than 90% of £275,000. On 25 August 1992 Mr Harris took out a bridging
loan facility for £130,000. On 20 November 1992 an advance payment of
compensation of £302,664.03 was made and, on 2 December 1992, the bridging loan
was paid off. Mr Harris said that he was advised by his former surveyor not to
seek an advance payment of compensation because this would have indicated
acceptance of the offer of £275,000. If given, this was wrong advice. Acceptance
of an advance payment of compensation is not an admission that the full sum is
accepted as the correct figure of compensation. By failing to accept the offer
made in November 1991 (which he accepted in his own mind a year later although
this was never communicated to the authority) and by failing to make a request
for advance compensation after 3 January 1992, Mr Harris failed to mitigate his
loss. The bridging loan was unnecessary: the money could have been obtained as
part of the compensation from the authority.
As to the remainder of the expenditure (£49,478
cost of works and £7,911.61 fees), the former figure is agreed and the fees are
disputed only in respect of value added tax. I agree with Mr Isaac that the
amount of this tax should not be recoverable and I accept his reduced figure of
£6,858.80. Accordingly, I find that the expenditure is limited to £56,058.80
(say £56,059), which was the natural, direct and reasonable consequence of the
dispossession and not too remote.
The third test in this reference relates to double
compensation. As indicated by Scott LJ in Horn it is a fundamental
principle of compensation that a claimant shall be paid "neither less nor
more than his loss". It follows that an item of loss cannot be compensated
for twice under different heads of claim. In considering the claim for works to
93 Cardiff Road, to provide similar accommodation to that in 60 Castle Street,
it is necessary to consider what was included in the agreed compensation for
the acquisition of 60-60A Castle Street. Unfortunately, neither party
considered this aspect of the case in any detail, but I have sufficient
evidence for my decision.
My findings on this matter are as follows. During
the hearing, Mr Harris confirmed that he accepted the price of £275,000 for his
freehold interest in 60-60A Castle Street. He had accepted this figure in his
own mind in August/September 1992. There is no agreed analysis of this price
but, having regard to the valuation in Mr Isaac’s evidence, I accept that the
value of the freehold with vacant possession of the accommodation occupied by
Mr Harris was £132,000 and the freehold investment value of the accommodation
let to the solicitors and motor mechanics was £143,000. Mr Harris received
advance compensation including 90% of the agreed value in November 1992. He
used part of this compensation to buy a holiday flat in Saundersford (£48,000)
and invested the remainder to be available to exercise his option to buy the
freehold of 93 Cardiff Road. The agreed floor area of the ground floor and
second floor of 60 Castle Street, occupied by Mr Harris for his business, was
1,500 sq ft. This accommodation included similar accommodation to that provided
at 93 Cardiff Road as extended and improved, namely reception, display area,
three consulting rooms, office, kitchen, workshop and toilets. Mr Harris
relocated his business to 93 Cardiff Road by taking a 10-year lease (including
an option to purchase the freehold), building a front extension of 611 sq ft
and carrying out extensive alterations to provide a total of 1,510 sq ft of
ground-floor accommodation with similar uses to those that he had enjoyed at 60
Castle Street.
Mr Harris now claims £37,368 towards the cost of
the works at 93 Cardiff Road. In my view, this claim is a second claim for
compensation for essentially the same loss of accommodation. Mr Harris owned
the freehold interest in 60-60A Castle Street with an agreed value of £275,000.
He received that sum to compensate him for the loss of this property. His
interest in land has been changed into the equivalent in money. On Mr Isaac’s
figures, £132,000 is to compensate Mr Harris for the loss of his business
accommodation and £143,000 is to compensate him for the loss of his investment.
He could use the former sum to relocate himself elsewhere, including
improvements to bring the new property up to the size and standard of
accommodation of his previous property. He could invest the latter sum to
replace his investment income. Mr Harris has chosen to save most of the money
and use part to buy a holiday flat. That is entirely Mr Harris’ decision, and I
do not accept the authority’s argument that notional investment income of
£10,000 pa should be offset against the loss of profits claim. But Mr Harris
cannot claim in the form of cost of works (disturbance) to provide
accommodation for the loss of which he has already been compensated. The floor
space provided by the front extension at number 93 (611 sq ft) is included in
the value of 60-60A Castle Street, and I heard no evidence on behalf of Mr
Harris to show that the value of the division of number 60 into reception,
consulting rooms, workshop and the like was not reflected in the price agreed
for this property.
In short, Mr Harris has been compensated for the
loss of accommodation of a certain size and a certain standard at 60-60A Castle
Street; he cannot claim again for providing that accommodation by
altering that building to provide accommodation similar to that at 60 Castle
Street. As Templeman LJ observed in Service Welding at p359:
Under rule (2) of section 5 of the Land
Compensation Act 1961, the claimants became entitled to the amount that the
Newcastle factory, if sold in the open market by a willing seller, might have
been expected to realise. Of course, they cannot have it both ways. If they are
compensated by being paid the value of the Newcastle factory, they cannot be
compensated in addition by being paid part of the price of the new factory.
In Mallick v Liverpool City Council
[1999] 33 EG 77* Henry LJ said at p79:
In the former case [ie where a business moved to
a new site], it is assumed that with the compensation paid he has acquired an
equivalent property suitable for the business, and under r 6… the claimant
will recover the disturbance costs of the move…
*Editor’s note: Also reported at [1999] 2 EGLR 7
The extension and improvements at 93 Cardiff Road
formed part of the cost of acquiring those premises. Mr Harris has already been
compensated for this accommodation in the price paid for 60-60A Castle Street.
This can be seen from the figures. The value of the business accommodation at
60 Castle Street was £132,000. The total floor area was 1,500 sq ft. The value
of the front 611 sq ft of retail space, equivalent to the front extension at 93
Cardiff Road, was worth at least £53,768 (611 sq ft as a proportion of the
value of 1,500 sq ft) and, being zone A accommodation, worth more. To this
figure must be added the apportioned value of the division of the remainder into
usable accommodation. It is clear that the value of the front 611 sq ft and the
division of the remainder at 60 Castle Street is approximately equal to, or
probably in excess of, the cost of the works to provide the same accommodation
at 93 Cardiff Road (£56,059). Even if the value at number 60 is slightly less
than the cost at number 93, it would be necessary for Mr Harris to satisfy the
fourth test, namely that he did not receive value for money for the excess
cost.
The claim fails the third test. It is an attempt
to recover double compensation for the same element of loss. It is true that Mr
Harris has spent his money on a leasehold property and that his compensation
relates to loss of a freehold. Mr Harris, however, has the right under the
option in the lease to buy the freehold at the end of the lease.
If, however, there is an excess cost in providing
the accommodation at 93 Cardiff Road, to provide what was acquired at 60 Castle
Street, it would be necessary for Mr Harris to rebut the presumption that he
has received value for money for this excess expenditure. This is the fourth
test. Clearly, he cannot do this because even Mr Holland’s lower figures show
that Mr Harris received value for money of £26,243, a figure that exceeds any
excess cost of providing the accommodation at 93 Cardiff Road. Mr Isaac’s
figure is much higher at £43,494. If Mr Holland’s figure is adjusted, using the
same yield, to relate it to the 10-year term of Mr Harris’ lease, the increase
in value due to the works is reduced to £19,000. The claim therefore fails the
value for money test. This issue, however, occupied a great deal of time at the
hearing and I should say a little more on this point, although it is not
necessary for my decision.
Mr Harris seeks to rebut the presumption of value
for money with the valuation evidence of Mr Holland. This attempts to show that
the expenditure has only increased the value of Mr Harris’ leasehold interest
in 93 Cardiff Road by £26,243, leaving expenditure of £37,368.62 for which he
has not received value for money. Mr Holland’s evidence is that the total
expenditure has produced a relatively small increase in rental value, or profit
rent, which Mr Harris can enjoy for a maximum period of 21 years. In Service
Welding counsel for the compensating authority gave an example of the rebuttal
of the presumption of value for money at p358:
There may be circumstances in which, for example,
the displaced claimant, in order to render the new premises that he acquires
suitable for his own purposes, must expend money on adapting them in a way that
will not enhance their value. In those circumstances, the cost of adaptation
would properly be recoverable as part of his disturbance compensation.
In my judgment, value for money is not necessarily
linked to an increase in the value of the claimant’s interest. It does not
automatically follow that, if the value of that interest has not increased
pound for pound with the expenditure on works, then the claimant has not
received value for money and has rebutted the presumption. Value for money is
not restricted to the value of an interest in land but should take into account
all the surrounding circumstances. In J Bibby & Sons Ltd v Merseyside
County Council (1979) 39 P&CR 53* one of the issues was whether
compensation should be awarded for increased operating costs in new and larger
premises, where this tribunal (WH Rees) found that the claimant was in a better
position than it was previously. Brandon LJ said at p63:
The member who gave the decision was an
experienced surveyor. Questions of valuation and assessment come naturally to a
person who is experienced in that way. I can only conclude that, having looked
at the matter from a practical surveyor’s point of view, he came to the
conclusion that Bibby had had value for the extra expenditure. That was a
conclusion to which an experienced tribunal of that kind was able to come, and
I do not see how this court can do other than accept this finding as an
unassailable finding of fact.
*Editor’s note: Also reported at [1979] 2 EGLR
14; (1979) 251 EG 757
The above extract from Service Welding is
intended to be an example only. This claim falls under the head of disturbance,
which is concerned with the personal loss to the claimant by his dispossession
from the land taken and not with land value. Rule 6 of section 5 of the 1961
Act refers to "disturbance or any other matter not directly based on the
value of land". In my view, the test of value for money involves the
question of whether the claimant received in return for his expenditure a
tangible and more than transient benefit that is of worth or utility to him. In
this reference the position is as follows. Mr Harris took a lease of 93 Cardiff
Road, which, before the works were carried out, comprised a house formerly used
as a dancing school and nursery with a ground floor area of 899 sq ft. The rent
of £13,000 pa reflected the state and size of the property before the works. Mr
Harris received value for money for that rent. He built a front extension of
611 sq ft and converted the property to suit the requirements of his optician’s
business. It is clear that these works, which have produced attractive business
premises, with a prominent frontage and well laid out accommodation, are a
tangible benefit to Mr Harris. They have enabled him to secure the continued
existence and profitability of his business. In my view, the whole of the
expenditure is of value to Mr Harris.
Even if Mr Holland’s approach is correct,
criticisms can be made of his figures. He has not reflected the option in his
calculations. This will be exercisable by Mr Harris as of right. Although it is
personal to him and does not add to the market value of the lease, in
disturbance we are concerned with value to the owner and not market value. The
value of the option to Mr Harris should therefore be taken into account. He
gave evidence that he is likely to purchase the freehold under the option in
2001 and is keeping his compensation liquid in order to do so. The true
position is not that Mr Harris will enjoy a small profit rent for 21 years in
return for the cost of the works, but that he will enjoy the full benefit of
the whole of the expenditure, in the form of larger and better accommodation
than existed when he took the lease, for the term of the lease and then in
perpetuity when he exercises his option to buy the freehold. Furthermore, any
calculations should take into account the better accommodation at 93 Cardiff
Road compared to 60 Castle Street. As I have indicated under the third test,
the value of the accommodation at 60 Castle Street has been compensated for in
the price agreed for this property, and this element of value should be
deducted in any value for money calculations to avoid double compensation. Only
the excess of the expenditure at the new premises over the value of the
equivalent accommodation at the land taken should be considered under the value
for money test. These adjustments would reduce the claim to nil. It is not
necessary for me to look at the value figures relating to number 93,
but I find it difficult to believe, as Mr Holland says, that this property had
a rental value of £16.50 per sq ft zone A both before and after the execution
of the works. 93 Cardiff Road, as extended and altered, is entirely different
from 93 as a former dancing school and nursery and would have commanded a
higher rent per sq ft, as stated by Mr Isaac.
My decision on this head of claim is that:
1. Mr Harris acted reasonably to mitigate his loss
by relocating his business to 93 Cardiff Road.
2. Mr Harris’ expenditure on works at 93 Cardiff
Road, reduced to £56,059, was the natural, direct and reasonable consequence of
his dispossession from 60 Castle Street and not too remote.
3. In the agreed compensation for 60-60A Castle
Street Mr Harris received at least £53,718 (and almost certainly more) to
compensate him for the accommodation that he provided at 93 Cardiff Road by the
expenditure of £56,059. This latter figure must be reduced by the former figure
to avoid double compensation and only the balance (the excess costs) can be
considered for compensation, provided Mr Harris did not receive value for
money.
4. If there was any excess expenditure to be
considered under the fourth test, Mr Harris received value for money.
Overall, the position is as follows. Mr Harris has
received compensation of £132,000 for the freehold of his former business
premises at 60 Castle Street (part of the total price of £275,000). He took a
10-year lease of 93 Cardiff Road at a rent of £13,000 pa. He receives value for
money for this rent. No premium was paid for this lease. The accommodation at
number 93 was inferior to that at number 60 and Mr Harris spent about £56,000
in extending and improving the property. The apportioned compensation relating
to the front part of 60 Castle Street, equivalent to the front extension at 93
Cardiff Road, is at least £54,000. The expenditure incurred by Mr Harris on 93
Cardiff Road increased the value of the lease by at least £19,000 (using Mr
Holland’s figures adjusted for a shorter term). Mr Harris will enjoy the
benefit of these works throughout his current lease, in the form of
accommodation of the same size and quality as number 60, to enable him to
maintain and improve the profitability of his business, and as a profit rent
and the premium value of the lease. At the end of the lease he has the right to
purchase the freehold at the open market value. He will then be able to receive
the benefit of his expenditure on improvements in perpetuity as both
accommodation for the profitable operation of his business and as part of the
value of the freehold interest. The presumption is that Mr Harris will receive
value for money on his purchase at the open market value. There is no evidence
to rebut this presumption. On this analysis of the overall position, Mr Harris
has suffered no loss under this head of claim. Mr Harris has not rebutted the
presumption that he has received value for money. The position is as explained
in the part of the judgment of Bridge LJ in Service Welding at pp357-358 set
out above. I award no compensation under this head of claim.
Claimant’s time
Claimant’s case
This claim is for the time spent by Mr Harris in
dealing with the acquisition of 60-60A Castle Street and the relocation of his
business to 93 Cardiff Road. At the close of the hearing the amount claimed was
£47,500, comprising 950 hours at £50 per hour. In his closing submissions, sent
in writing after the close of the hearing, Mr Jones reduced this figure to
£39,375, comprising 875 hours at £50 per hour less 10%. The claim relates to
the period from January 1992 to about May 1993.
Evidence
Mr Harris said that he employed an extra member of
staff to assist him with relocation. She recorded the time spent by him under
various headings. Copies of the original entries were put in evidence, and, at
my request, these were summarised under six headings. Time was recorded in
half-hourly units. Information was often extracted from Mr Harris’ diaries.
Time spent on telephone calls was not recorded but that spent on correspondence
was included. Mr Harris worked in the practice 4.5 days per week from 8.45am to
6pm each day. He did not take a salary.
Mr Harris had no figures to support an hourly rate
of £50. He was given this figure by Mr Davis. He had a potential to earn this
amount as remuneration under the NHS and would earn significantly more with
private work.
Mr Harris was extensively cross-examined on
individual entries in the original records. He conceded that £50 is high but
not unreasonable. It represented time and inconvenience. He further conceded
that the hours claimed were high and the total claim was too high but he
declined to reduce it. He said that the authority’s figure of £8,300 is wholly
unreasonable.
Mr Davis did not deal with this head of claim in
his evidence, but, in view of Mr Harris’ statement that he obtained the figure
of £50 from him, I asked him how he arrived at this figure. He said that he did
not calculate this hourly rate. It was suggested to him by Mr Harris as an
appropriate claim figure and he agreed after a general consideration of
professional charges.
Submissions
Mr Jones said that this head of claim is
recoverable: DB Thomas & Son Ltd v Greater London Council*.
This has been accepted by Mr Isaac. The proper approach is to establish the
amount of time Mr Harris actually and reasonably spent on relocation and then
apply a fair and reasonable hourly rate. Although Mr Harris employed agents he
was entitled to be present when matters affecting his business were dealt with.
Mr Harris kept a log of time spent and his integrity has not been called into
question. He is a professional man; his evidence should be accepted.
*Editor’s note: Reported at [1982] 1 EGLR 197;
(1982) 262 EG 991 and 1086
Mr Jones said that £50 per hour has been attacked
as excessive, but Mr Brinson sought £70 per hour from the authority for dealing
with this claim. The rate has also been attacked on the grounds that Mr Harris
was not making that amount per hour in his practice. This reasoning is flawed
because it takes no account of Mr Harris’ other business interests and sources
of income and seeks to forge an illogical link between the amount earned in a
day job and a reasonable sum for work necessarily undertaken on relocation. It
also fails to recognise that the courts do not follow this approach, see eg
costs payable to a litigant in person under RSC Ord 62 r 18 (2), where he can
claim two-thirds of a solicitor’s rate. Although Mr Harris is not a litigant in
person, this is a fair analogy or check on the reasonableness of £50 per hour.
Authority’s case
Evidence
Mr Isaac commented on the time sheets produced to
support the claim for Mr Harris’ time. He said that this was initially recorded
hourly and then half-hourly; an hourly rate of £50 is excessive; a number of
the time sheets are illegible and difficult to reconcile and all are poorly
structured and presented; there is no other proof of the time claimed; much of
the time claimed is excessive bearing in mind that Mr Harris had advisors to
assist him. This is a legitimate head of claim but the amount claimed is
unreasonable. Mr Harris has made no attempt to mitigate his loss.
Mr Isaac calculated a reasonable sum under this
head to be £8,300 comprising a notional agent’s fee of 10% of the rent for 93
Cardiff Road (£1,300), plus £5,000 for corresponding with all the claimant’s
professional contacts and £2,000 for organising and co-ordinating relocation.
The figure of £5,000 is in line with settlements in other claims.
In cross-examination Mr Isaac was asked the hourly
rate paid by the authority to Brinsons for checking Mr Harris’ documents. He
said that a rate of £70 was quoted but has not been agreed. Mr Isaac said that
a reasonable rate for charging Mr Harris’ time would be £20.91 per hour. He
arrived at this figure by taking a net profit of £57,000 pa for the two years
prior to relocation, deducting the profit rent to produce an adjusted net
profit of £43,500 and then dividing this by 2,020 hours (52 weeks at 40 hours
per week).
Submissions
Mr Jarman said that the authority have at all
times made it clear that the time claimed and the hourly rate are excessive. It
is for the claimant to make out his claim. The claim is poorly supported by
contemporary records. Mr Harris could not say what his claimed hours related
to. He always rounded up not down. The authority spent much time checking the
disturbance claims from original documents. Mr Harris insisted upon being
present at meetings even though he had a solicitor, surveyor and accountant
advising him. He has employed four different surveyors. Some of the time
claimed has been spent on the promotion of his business.
A rate of £50 per hour is excessive. It is
inappropriate to support it by reference to the rules relating to a litigant in
person. There is inconsistency between Mr Harris and Mr Davis as to where the
£50 per hour came from. The NHS hourly rate is a gross figure with a profit element.
The claimant’s evidence is unreliable. The
tribunal should attempt to arrive at a reasonable amount. Mr Isaac’s figure of
£8,300 is reasonable and in line with other negotiated settlements.
Decision
It is common ground that this head of claim is
admissible and that the burden of proof is on the claimant.
I look first at the hours claimed. Before Mr
Harris was cross-examined, this part of the claim had the appearance of support
from original records and some appearance of accuracy. His evidence-in-chief
added to this impression. Under cross-examination, however, the appearance of
accuracy largely disappeared and it is clear to me that the hours claimed have
been exaggerated and that the records are unreliable. It is not expected that,
in the heat and stress of acquisition and relocation, a claimant will be able
to keep accurate and detailed records of time spent on these matters. But the
impression I have been left with on this head of claim is that Mr Harris is
seeking to increase his compensation with wholly unreliable evidence. I give no
weight to the claimant’s evidence on this matter.
As to the hourly rate, £50 per hour is unsupported
by the circumstances of the claimant or his business. Mr Harris could not
justify this figure and said that it was given to him by Mr Davis. Mr Davis
said that it was suggested by Mr Harris; he merely endorsed it as being in line
with professional charges. Mr Jones sought to support it by reference to the
costs recoverable by a litigant in person. There were unconvincing attempts to
support it by reference to NHS and private optician’s rates and Mr Harris’
other business interests, on which no evidence at all was given. I am satisfied
that £50 per hour is unsupported. I reject it.
I reject the claimant’s case on this head of claim
as unsupported and unreliable. I am left with the authority’s figure of £8,300,
which I regard as reasonable, perhaps generous, even though I have doubts to
the manner in which it has been calculated. However, Mr Isaac’s hourly rate of
just under £21 was calculated by reference to Mr Harris’ accounts and is a
realistic approach. This rate allows for just under 400 hours of time in a
claim of £8,300. This seems to me to be fair and reasonable.
I award £8,300 under this head of claim.
Loss of profits
Claimant’s case
This claim is for the total sum of £54,363
comprising loss of profits in 1992 (£13,535), 1993 (£14,987) and 1994
(£25,841).
Evidence
Mr Davis said that 60 Castle Street was included
in an independent account to allow a separate return of rental income. A
nominal rent of £960 pa was included as a charge against Mr Harris’ business.
The gross profit increased after the move, but Mr
Davis did not think this was significant. There was a reduction in the rate of
gross profit from 64.8% in 1990 to 61.7% in 1992. This was not due to outside
competition but to the difficulties encountered in running the business during
these years. Competition from Specsavers did not come until 1993 and is
reflected in the fall in turnover in 1994.
Mr Davis said that the accounts should not be
adjusted for notional rent, as argued by Mr A Jones in his evidence for the
authority. Interest derived from the investment of compensation is simply
replacing the rental income from 60-60A Castle Street and does not help the business.
Mr Davis accepted the other adjustments to the accounts suggested by Mr A
Jones, namely the addition to the actual net profits of the PAYE settlement
(£15,000) and additional staff (£3,000) in 1992, and additional staff (£14,000)
and professional fees (£6,885) in 1993.
Mr Davis calculated his figure of £54,363 for loss
of profits as follows. During the years 1989 to 1991 (before relocation) the
average net profit margin was 22.9%. In 1992 it was 17.72%, in 1993 it was
18.29% and in 1994 it was 13.67%. Applying the pre-move net profit margin of
22.9% to the actual turnover for each of the years 1992 to 1994 produced
shortfalls in the net profits for those years of £13,535 in 1992, £14,987 in
1993 and £25,841 in 1994, totalling £54,363. By 1995 the net profit margin had
risen to 26.5%.
Mr Davis said that the purchases in the agreed
summary of accounts represent the cost of stock sold during the year, ie
purchases adjusted for stock at the beginning and the end of the year. He
rejected Mr A Jones’ evidence that there was a build-up of stock that affected
the profitability of the business. In 1995 the purchases figure was low
compared to earlier years. Turnover had increased, value added tax reduced and
Mr Harris may have been able to buy stock more cheaply. Mr Jones’ approach
involved rewriting the accounts.
Submissions
Mr Geraint Jones criticised the accounting
evidence given by Mr Anthony Jones. He put forward a hypothesis, particularly
with regard to the hoarding of stock, and then considered that it was for the
claimant to disprove it. Mr A Jones said that he was adjusting the claim and
not rewriting the accounts but eventually had to accept that the adjustments
necessarily involved restating the profits. It was untenable for Mr A Jones to
say that he was not levelling an accusation of fiscal impropriety at Mr Harris.
Mr A Jones accepted that there is no recognised accountancy protocol that
allowed the rewriting of the accounts.
Mr A Jones conceded in his evidence that there was
a loss of profit of £26,852 but then went on to remove it on the basis of his
hypothesis of stock hoarding, which he then said it was for Mr Harris to
disprove. Mr Jones submitted that there is no such onus of proof on the
claimant. The burden of proof is on the authority to show that the accounts
(prepared by an accountant and acted upon by the Inland Revenue) are wrong and
should be rewritten.
At 60 Castle Street Mr Harris had a return in rent
from the solicitors and motor mechanics and the use of business premises, for
which, if he had not owned them, he would have had to pay a rent of about
£13,000 pa. Mr A Jones was correct not to deduct the rent of £13,000 pa under
the lease of 93 Cardiff Road from his calculation of loss of profits because Mr
Harris was making less profit and he had to pay a rent for two of the years for
which loss of profit is claimed (1993 and 1994). This was a reflection of the
true return on his freehold at 60 Castle Street. Rent was not paid in 1992,
other than £960 pa, which should be added back. Even if a case could be made
out for deducting the rent paid of £13,000 pa in 1993 and 1994 from the loss of
profits (adjusted for 2 x £960 pa), the claim would still be £30,283.
The evidence of Mr Davis was not shown to be
flawed or based upon suspect accounting principles. Accountancy protocols apply
to the preparation of accounts, not to their subsequent interpretation.
Mr Jones said that Mr Davis’ figure of £54,363
cannot legitimately be altered. Even though the gross profit margin was
declining prior to relocation, the significant fact is that it averaged 22.9%
over the three years before relocation and was lower in 1992 to 1994.
Authority’s case
Evidence
Mr A Jones said that the overall profit of the
claimant’s business has not been adversely affected by relocation to 93 Cardiff
Road, but rather
the same level after 1992 due to the starting of a Specsavers business in
Caerphilly.
In 1992 Mr Harris bought more stock than the
business required. The excess was £3,000 but, by 1993, the turnover had
increased so rapidly that purchases had to be increased further to keep up with
demand. Profit increased by 22% between 1991 and 1993 indicating that
relocation was a boost to the claimant’s business.
Following relocation to 93 Cardiff Road, Mr Harris
has to pay the rent. This is an additional cost but, in 1993, he received
£311,000 part payment of compensation. He had the opportunity to invest that
sum and earn interest of not less than £10,000 pa. Mr A Jones added this to the
actual net profits for 1993-1995 to offset the rent charged.
Comparing net profits before and after relocation,
Mr A Jones said that the typical net profit from 1989-1991 was £57,000 pa and,
by 1995, Mr Harris was over £25,000 better off than if he had continued to
trade at 60 Castle Street. The accounts show that relocation increased turnover
and profit. The move has benefited the business and Mr Harris has received over
£311,000 in cash. The disturbance element is therefore more than adequate in
the circumstances.
Commenting on Mr Davis’ evidence, Mr A Jones said
that there was no reduction in gross profit from 1990-1992. Gross profit rose
from £151,523 in 1989 to £161,258 in 1992 and £229,466 in 1995. There were significant
increases in purchases between 1991 and 1994, compared to 1989, 1990 and 1995.
The effect of these increased purchases was to reduce the gross and net profit
for those years.
Mr A Jones said that the claim for loss of profits
should compare the typical net profit for the years preceding the claim period
with the claim period. Adjustments should be made for unusual matters. The
average net profit for 1989-1991 was about £57,000 pa. In 1992 there was a loss
on this average of £10,664, in 1993 a gain of £2,495 and in 1994 a loss of
£18,683. Therefore, the figure for loss of profits should be £26,852. But there
were substantial increases in purchases between 1991 and 1994, average
£103,104, compared to £77,698 in 1995. The clear implication is that a proportion
of the stock acquired between 1992 and 1994 was sold in 1995. The cost of these
additional purchases of stock is not a fair charge against profits during the
claim period. The average figure for 1989-1995 would be a fair reflection of
the needs of the business. This is £94,000, showing that additional stock of
£27,311 was purchased between 1992 and 1994. Making adjustments for additional
stock and interest receivable of £10,000 pa produced a net gain for 1992-1994
of £20,459 compared to the claim for a net loss of £54,363.
In answer to questions from me, Mr A Jones said
that he has made no adjustments in his figures for the deduction of rent or
rental value. He agreed that a like for like comparison between trading at 60
Castle Street and at 93 Cardiff Road requires the deduction of the rental value
for each property.
Submissions
Mr Jarman said that a loss of profits claim
usually arises where the claimant’s trading pattern has altered. In this case
Mr Harris closed his business at 60 Castle Street on Saturday 15 August 1992
and reopened on the following Monday at 93 Cardiff Road. There was no break in
trading.
Mr Jarman said that many of the questions put to
Mr A Jones ignored the vital distinction between the preparation of accounts
and the calculation of a loss of profits claim. The differences between Mr
Davis, for the claimant, and Mr A Jones, for the authority, rest on three
issues: whether it is appropriate to take a margin or an average when
calculating net profits; the treatment of the cost of sales (stock); and
whether notional interest on the compensation paid should be taken into
account.
When calculating a loss of profits claim there are
no accounting protocols to follow. Mr Davis took the average net profit margin
for the three years to 1991 but this method is flawed. From 1989 to 1991
turnover increased annually but profit margins fell. For 1991 the profit margin
was just under 21% but the net profit remained steady. Accordingly, it is more
appropriate to take the average net profit for the three years prior to the
move to indicate profitability. Mr A Jones did not allow for inflation and he
did not allow for profit rent or rent-free periods. There must be some give and
take. Mr Davis accepted that he made no allowance for competition from
Specsavers and another optician who opened in 1995. He also accepted that an
impact on profits was likely.
With regard to the cost of sales, Mr Jarman
submitted that there were clearly anomalies in 1991-1993 and 1995. These could
not be explained by the claimant. Unless these differences can be explained or
averaged out they produce an erratic net profit. Mr A Jones was justified in
saying that, in the absence of a satisfactory explanation, a fairer and more
accurate way would be to take the average cost of sales over the whole period
1989-1995 for the purposes of evaluation of loss of profit. With regard to the
deduction of notional interest, this makes no difference to Mr A Jones’
calculation that there was a net gain for the period that is not reflected elsewhere.
Mr Jarman said that the claimant moved to bigger
and better premises without a break in trading. In his first year in the new
premises his turnover shot up to £325,000. Thereafter, despite adverse
competition, his turnover remained higher than at any time prior to relocation.
It is unrealistic to claim that the business has suffered as a result of the
move to 93 Cardiff Road.
Decision
This claim for loss of profits is in respect of
the financial years ended 31 August 1992, 1993 and 1994 in the total sum of
£54,363. Mr Harris moved to 93 Cardiff Road between 15 and 17 August 1992, and
therefore the claim relates to lost profits in the last trading year at 60
Castle Street and the first two years at 93 Cardiff Road. Mr Davis’ method of
calculating the loss is to apply the average net profit margin of 22.9% for the
years 1989-1991 to the actual turnover for the years 1992-1994 producing a
shortfall in net profit of £13,535 in 1992, £14,987 in 1993 and £25,841 in
1994. Mr A Jones made detailed criticisms of the claim, particularly with
regard to stock levels and the need to bring into account notional interest on
compensation to offset rent paid at 93 Cardiff Road. He made the general
criticism that profitability had not been adversely affected by relocation.
The burden of proof is on the claimant to show
that the loss claimed was caused by the dispossession or threat of
dispossession from 60 Castle Street and relocation at 93 Cardiff Road. I make
the following general comments on this head of claim.
In my judgment, the correct approach to this head
of claim is as follows. First, the evidence should be examined to ascertain
whether there is shown to be a causal connection between the acquisition and
dispossession from the land taken and the loss claimed. If this connection can
be established, then the true loss of profits should be calculated. As to the
matter of calculating this loss, I do not agree with the method adopted by Mr
Davis. Nor do I agree with the method suggested by Mr A Jones. In my view, the
correct approach is to compare the estimated net profit that would have been
achieved if trading had continued at 60 Castle Street, unaffected by the
compulsory purchase, with the actual net profit achieved at 60 Castle Street in
1992, and at 93 Cardiff Road in the two years after relocation. Any shortfall
in net profit must be shown to be the consequence of the acquisition and
dispossession from 60 Castle Street and not due to other factors, eg increased
competition. I return to this matter later.
My second point is that the comparison by Mr Davis
of the average net profit margin of 22.9% for the three years to 1991 with the
profit margins in 1993 and 1994 is not an accurate comparison on a similar
basis. For the years 1989-1991 the deductions for rent and rates were between
£6,659 and £8,183. After the move the deductions were between £20,003 and
£22,500. The reason for this considerable increase is that at 60 Castle Street
a deduction of only £960 pa was made for notional rent; at 93 Cardiff Road the
full rent payable under the lease of £13,000 pa was deducted. In order to make
a true comparison between costs in the old and new premises, the full annual
cost of occupation must be deducted for the former property. The only evidence
I have as to the rental value of 60 Castle Street is contained in Mr Isaac’s
valuation producing the agreed price of £275,000. This includes a rental value
of £14,420 pa for the accommodation occupied by Mr Harris. I received no
evidence on behalf of Mr Harris as to whether that figure was agreed or should
be some other figure. On this evidence, the profit rent to be deducted is
therefore £13,460 pa. This deduction reduces the net profit margins to 18.4%,
18.3% and 16% for 1989-1991, an average of 17.6% compared to Mr Davis’ figure
of 22.9%.
Mr A Jones sought to offset the payment of rent at
93 Cardiff Road by the addition of £10,000 pa notional interest. This appears
to be on the grounds that Mr Harris has received compensation for the loss of
rent at 60 Castle Street, but no credit has been given for the interest earned
by that compensation. As I said earlier in this decision, I cannot accept that
Mr Harris must give credit in his claim for this notional interest. The
compensation paid to Mr Harris for the acquisition of 60-60A Castle Street
comprises the capital value of the rental value of the accommodation occupied
by him and rent and rental values from the two lettings. Mr Harris may use this
compensation as he wishes, but to produce a true picture of the trading profit
at number 60 it is necessary to deduct the full annual value of that
occupation, for which Mr Harris has received compensation in the value of the
land.
My third comment on the claim figures is that Mr
Davis has failed to take into account the falling profitability of the business
at 60 Castle Street. He has projected forward an average net profit margin
against a true background of falling margins. Between 1989 and 1991 turnover
rose from £234,096 to £274,368, but the gross profit margin fell from 64.7% to
63.3% and the net profit margin from 24.14% to 20.94%. To use an average figure
of 22.9% to calculate future loss of profits is unrealistic. It is likely that
the falling margin of net profitability would have continued if Mr Harris had
remained at 60 Castle Street, producing lower estimated profits to compare with
the actual profits at 93 Cardiff Road.
Fourth, I deal with Mr A Jones’ main criticism of
the net profit claim, namely that the stock purchased was artificially high
leading to reduced profits during the claim period. I do not agree with this
criticism. An analysis of the stock figures in relation to turnover does not
show particularly high stock purchases. I have considered both the agreed
summary of accounts and the more detailed accounts put in evidence during the
hearing.
In the agreed summary the item below turnover,
labelled "Purchases", is in reality a net figure representing the
purchases during the year plus stock at opening less closing stock. The parties
agree that this item is more correctly labelled "Cost of sales".
Considering first the purchases (cost of sales) in
the summary accounts, between 1989 and 1991 these rose from £82,573 to £101,588
representing 35.3%, 35.2% and 37% of turnover each year, an average of 35.8% of
turnover. During the claim years, 1992-1994, the figures were £100,188,
£112,385 and £96,738, representing 38.3%, 34.6% and 34.5%, an average of 35.8%
of turnover. In 1995 the figure was only £77.698 or 25.3% of turnover. Looking
at these figures, and making a comparison between the three years before
relocation and the claim years, reveals the same average of 35.8% for both
periods. I cannot accept therefore that excessive purchases of stock took place
in the claim years to the detriment of profits. There was a fairly constant
level of stock throughout the period 1989-1994 with a reduction in the figure
for 1995.
The same pattern is seen if we consider the
detailed accounts and look at the actual purchases of stock each year. Between
1989 and 1991 stock purchases were £81,240, £87,119 and £101,875, representing
34.7%, 36.5% and 37.1% of turnover, an average of 36.1%. For the claim period,
1992-1994, the purchases were £106,134, £111,141 and £93,667, representing
40.6%, 34.2% and 33.4% of turnover, an average of 36.1%. In 1995 stock
purchases fell to £79,429 or 25.9% of turnover. Again, a comparison between the
three years before acquisition and the claim years reveals the same average
figure of 36.1% of turnover. 1995 is the odd year out. In that year the actual
stock purchases fell.
I cannot accept Mr A Jones’ criticism that stock
purchases were particularly high for the claim years and that this increases
the loss of profits claimed. The purchase of stock in relation to turnover was
similar for 1989-1991 and 1992-1994. It can be said that there was a consistent
level of stock purchases during the whole of the period 1989-1994 with a
reduction in 1995. I do not consider that there was an artificial increase in
purchases during 1992-1994 resulting in reduced profits. I find that the
accounts do not require amendment in respect of stock purchases. I think that
Mr A Jones was wrong to look at the purchase figures in isolation: they should
be related to turnover.
As I stated earlier in my decision, on this head
of claim there must be a causal connection or direct link between the loss of
profits claimed and the compulsory acquisition and dispossession. It is not
enough to show an apparent loss. In Harvey Denning LJ spoke of a
claimant’s entitlement to disturbance that "includes all damage directly
consequent on the taking of the" property under statutory powers (p492).
Romer LJ said that the loss must be the natural and reasonable consequence of
the dispossession and not too remote (p494). In Shun Fung Lord Nicholls
referred to the underlying principle of fair and adequate compensation, or
equivalence, and said that in the application of this principle three
conditions must be satisfied. These relate to causation, remoteness and
litigation. On causation he said at p126A:
it goes without saying that a prerequisite to an
award of compensation is that there must be a causal connection between the…
acquisition and the loss in question.
Disturbance is essentially loss arising out of
dispossession by compulsory purchase. I must consider whether, on the evidence,
Mr Harris has shown that there is a causative link between the loss of profits
claimed and his dispossession from 60 Castle Street and relocation at 93
Cardiff Road. Dispossession in this context includes not only the actual dispossession
in August 1992 but all other matters directly arising out of the compulsory
purchase and threat of dispossession: see Lord Nichols in Shun Fung at
p137G.
Against this background of law I consider whether,
on the evidence and for each of the claim years, there is a causal connection
between the loss of profits claimed and the threat of, and dispossession of,
the claimant from 60 Castle Street.
I look first at the financial year ended 31 August
1992. Mr Harris moved from 60 Castle Street to 93 Cardiff Road by closing the
business at number 60 on Saturday 15 August and reopening in the new premises
on Monday 17 August. Mr Harris gave evidence that in the period before
relocation, profitability reduced as a result of blight and neglect in the area
surrounding 60 Castle Street. There was a progressive increase in crime, arson
etc. He also gave evidence of his search for alternative premises and the time
spent on relocating to 93 Cardiff Road.
I accept that 1992 was a difficult year for Mr
Harris and his staff and that this resulted in a reduction in turnover and net
profit. There was uncertainty, the threat of dispossession and the need for Mr
Harris to seek other premises and arrange for relocation to 93 Cardiff Road. Mr
Harris’ time was spent on matters of compensation and relocation to the
detriment of profitability, a matter that has been partly taken into account
under the head of claimant’s time. I find that there is a causal connection
between the dispossession from 60 Castle Street and the loss of profits in
1992.
As to amount, however, I cannot accept Mr Davis’
figure of £13,535 for the reasons given above. The net profits for 1989-1991
were £56,524, £57,040 and £57,467. To find the true net profit for each of
these years, the profit rent of £13,460 must be deducted, reducing the figures
to £43,064, £43,580 and £44,007. The trend was a very slightly rising net
profit, up 1.2% from 1989 to 1990 and up 0.97% from 1990 to 1991. I find that,
in the absence of the compulsory purchase, the net profit at number 60 for 1992
would have risen by 0.8% from the 1991 figure to £44,360. The revised net
profit for 1992 is stated to be £46,336. The profit rent at number 60 for the
period to 15 August must, however, be deducted, reducing the true net profit to
£33,394. The loss of profit in 1992 was therefore £10,966 (£44,360 less
£33,394).
The claim for 1993 is higher than for 1992, even
though net profit and turnover showed increases over all previous years. I
heard no evidence to show that the alleged loss in 1993 was caused by the
dispossession from 60 Castle Street and
I am satisfied that there is none. The claim for this year is without
foundation and I reject it. I award no compensation for loss of profits for
1993.
The claim for 1994 is £25,841, the highest for all
the claim years, but again no evidence has been given linking this alleged loss
with the dispossession and relocation. It is true that turnover fell from the
peak of £325,251 in the previous year to £280,167 (before rising again to
£307,164 in 1995) but there is no link between the fall in turnover and the
acquisition of 60 Castle Street. It is difficult to see how a fall in
profitability in the second year in new premises, after a profitable first year
in the new property, could be due to a dispossession two years earlier. Mr
Davis said that the drop in turnover in 1994 was due to competition from
Specsavers. This may well be correct, but compensation is not awarded for the
effects of competition. The claim for 1994 is also without foundation, and I make
no award for this year.
I award £10,966 for loss of profits.
Capital gains tax
Claimant’s case
The parties have agreed that on the disposal of
the claimant’s freehold interest in 60-60A Castle Street he incurred a capital
gains tax liability of £32,524.80. Mr Harris claims this sum as compensation.
Evidence
Mr Harris said that, in the absence of
acquisition, he would have retained 60-60A Castle Street as an investment, even
after his retirement from the practice.
Mr Davis said that Mr Harris is entitled to
compensation for the CGT that only became payable as a consequence of the
compulsory purchase.
Submissions
Mr Jones submitted that this claim fell within the
second limb of r 6 of section 5 of the 1961 Act. I should apply parity of
reasoning with the courts where recovery of CGT is allowed, for example, where,
by reason of professional negligence, tax has become payable in circumstances
where, in the absence of such negligence, it would not have been payable or
would not have been payable so early. CGT is, in reality, a voluntary tax and
can legitimately be avoided or deferred indefinitely by tax planning. Even on
death CGT is not payable where inheritance tax is payable. By analogy with a
cessation case CGT would be claimable. Mr Jones referred to: McGregor on
Damages (16th ed) paras 617-618; the Taxation of Chargeable Gains Act 1992,
sections 21-23 and 245; Wood Mitchell & Co Ltd v Stoke-on-Trent
City Council (1978) 38 P&CR 126*; and Lowes v Clarke
Whitehill unreported 21 November 1997.
*Editor’s note: Also reported sub nom
Stoke-on-Trent City Council v Wood Mitchell & Co Ltd
[1978] 2 EGLR 21; (1978) 248 EG 870
The question to be answered is: was Mr Harris’
estate worth less as a result of the compulsory purchase and the payment of
CGT? The answer must be "yes". If Mr Harris had retained 60-60A
Castle Street he would have had an asset worth £275,000 in his net estate. He
has received money for his freehold but with a tax liability of £32,524.80. His
net estate has been reduced by that amount. This would not have occurred if
60-60A Castle Street had not been compulsorily converted into cash. No credit
should be given for the interest received by Mr Harris on the purchase price.
This claim is not contrary to r 1 of section 5 of
the 1961 Act, as argued by Mr Jarman. This provides that the compulsion in the
purchase is not to be taken into account. It is a corollary of r 2; it does not
turn a claimable loss into an allowance.
Authority’s case
Evidence
Mr A Jones said that 60-60A Castle Street is not
shown in the accounts of Lawrence & Harris. It is not an asset of the
business and the business has not received any of the profit on the sale of the
property. Therefore, the CGT payable on that profit should not be an item for
which the business can claim. Clearly, either both the profit on sale and the
tax liability should be brought into account or neither should be. There is no
basis for this claim. In cross-examination Mr A Jones conceded that Mr Harris
is worse off by the amount of the tax paid, but said that this loss is not
recoverable in principle.
Submissions
Mr Jarman said that this is a groundbreaking
claim. Although this does not necessarily mean that it is misconceived, in his
submission it is. The claim is made under the second limb of r 6 on the basis
that the claimant could have avoided paying CGT in the absence of the
compulsory acquisition. This is contrary to r 1 of section 5 of the 1961 Act,
which is not overridden by r 6. To provide for CGT would be to make an
allowance on account of the acquisition being compulsory. In any event,
compensation must be direct and reasonable and not too remote. Whether or not
CGT would have been payable depends on a number of factors, some of which would
be outside the claimant’s control. The Lands Tribunal is not in a position to
speculate on these matters.
Mr Jarman accepted that a claim can be made for
tax that could otherwise be avoided and that became payable due to negligent
professional advice. In these circumstances, the advice is sought for the
purpose of avoiding tax, and, if the advice is negligent and tax becomes
payable, it is obvious that a claim will lie. This is a matter of common law
and is not based on the statutory rules for assessing compensation. Mr Jarman
referred to Lowes and said that in this reference the claimant may or may not
have had to pay tax depending upon future events. It did not arise out of
action taken in reliance upon advice.
Decision
On the disposal of the claimant’s freehold
interest in 60-60A Castle Street under the compulsory purchase order he
incurred an agreed liability to CGT of £32,524.80. He claims reimbursement of
this sum as compensation under r 6 of section 5 of the 1961 Act. This is a
novel claim. Neither counsel was able to refer me to any decision of the courts
or this tribunal on a claim for CGT arising out of compulsory acquisition and I
am aware of none. It does not, of course, mean that the claim must necessarily
fail because it breaks new ground. In Emslie & Simpson Ltd v Aberdeen
City District Council [1994] 1 EGLR 33* Lord Hope said at p38C:
the categories of what may be recovered under a
claim for disturbance cannot be treated as a closed list.
*Editor’s note: Also reported at [1994] 18 EG 136
This may also be applied to "any other matter
note directly based on the value of land" under the second limb of r 6,
but I note that in Wrexham Maelor Borough Council v Macdougall
[1993] 2 EGLR 23† Ralph Gibson LJ, referring to a claim for compensation for
loss of a service agreement made under the second limb of r 6, said at p32J:
The rule has been in place since 1919. It must, I
think, be uncommon for the owner of an interest which is compulsorily acquired,
and who is not in occupation, to be able to point to some significant damage
consequent upon the taking of his interest, other than costs and expenses,
which is the natural and reasonable consequence of the taking of his interest
and not too remote.
†Editor’s note: Also reported at [1993] 49 EG 115
I note, however, that the Court of Appeal in this
case upheld the decision of this tribunal awarding compensation under the
second limb of r 6 for loss of this service agreement.
I look now briefly at the statutory provisions
relating to CGT, which are contained in the Taxation of Chargeable Gains Act
1992 (the 1992 Act). CGT applies to the disposal or assumed disposal of assets,
including land; a disposal includes the sale of land. It is not in dispute that
the compulsory acquisition of 60-60A Castle Street was a disposal for CGT
purposes. A disposal creates a possible liability to CGT. In general terms, a
CGT computation comprises the deduction from the consideration for the disposal
of certain allowable expenditure, such as the cost of acquisition, improvements
and costs of disposal, and then the
date of acquisition. Where a property was owned on 6 April 1965, only the gain
after that date is taxable. Where a property was owned on 31 March 1982, the
market value at that date can be substituted for the earlier acquisition cost
to reduce the gain. In practice, the gain on the disposal of a property
purchased before or after March 1982 will usually be restricted to the real
gain since that date or any later date of purchase. I was not told how Mr
Harris’ CGT liability was calculated, but the parties have agreed that it was
£32,524.80.
Provision is made in sections 52(4) and 245 of the
1992 Act for the purchase price, compensation or other consideration on
compulsory purchase to be apportioned and part treated as a capital sum for CGT
purposes.
Sections 247 and 248 of the 1992 Act contain
provisions for rollover relief on compulsory purchase. Generally, where an
owner disposes of his land to an authority exercising or having compulsory
purchase powers and he applies the consideration for the land taken to the
acquisition of other land within a specified period, then he is entitled to
rollover relief. The effect is that: (1) the disposal of the land taken is
treated for CGT purposes as producing neither a gain nor a loss; and (2) the
consideration for the acquisition of the new land is reduced by the excess of
the actual consideration for the disposal of the land taken over the notional consideration,
which produced no gain and no loss on that disposal. In other words, the gain
that would have arisen on the compulsory acquisition is deferred until the
disposal of the replacement property. It is common ground that Mr Harris has
been unable to claim rollover relief due to his failure to purchase a
replacement property.
I consider next the cases to which I have been
referred by Mr Jones and then two other decisions that are relevant to this
issue.
Mr Jones referred me to the decision of the Court
of Appeal in Wood Mitchell & Co Ltd v Stoke-on-Trent City Council
but made no submissions on it. This decision deals mainly with the question
whether tax should be deducted from compensation payable on compulsory
purchase, a matter that is not in issue in this reference. The decision makes
it clear, however, that a liability for CGT arises out of compulsory purchase
and that the total compensation may be apportioned into capital and income
elements: see now section 245 of the 1992 Act.
The other case referred to by Mr Jones is Lowes
v Clarke Whitehill, an unreported decision of the Court of Appeal given
in November 1997. In this case Mr and Mrs Lowes, owners of a limited company,
brought an action for negligence against Clark Whitehill, chartered accountants,
in respect of alleged negligent advice regarding the sale of the company. It
was their case that this advice resulted in a CGT liability that could have
been avoided. In the High Court the plaintiffs were successful in their
allegation of negligence but were awarded only nominal damages on the grounds
that the advice had caused no loss. Both parties appealed. The plaintiffs’
appeal was dismissed and the defendant’s cross-appeal allowed.
Counsel for Mr and Mrs Lowes submitted that the
defendants’ failure to give proper advice resulted in a tax liability that they
would not have had to pay. This was the true measure of their loss. They were
entitled to recover that sum in full, or, in the alternative, discounted for
the possibility that they might nevertheless not have chosen to sell the assets
of the company rather than the shares.
Mr Jones relies on part of the judgment of Beldam
LJ when he said that it "is a first principle of damages that they are
intended to place a plaintiff in the position he would have been in had the
breach of duty of which he complains not occurred". In compensation, this
is the principle of equivalence, which I consider again below.
I now consider two cases that seem to me to be
relevant to this issue. The first is Taylor v O’Connor [1971] AC
115 This concerned the damages payable to a widow under the Fatal Accidents
Acts. The damages themselves were not taxable but the House of Lords held that,
where the amount warranted it, account should be taken, when deciding the
amount of the annual dependency to the widow and the multiplier to be applied
to it to calculate the lump sum damages, of the fact that interest on the
damages would be subject to income tax. Lord Reid said at pp128-129:
The damages for the loss of dependency ought to
be such that she will have available to spend each year, free of tax, a sum
equal to the amount of the dependency. But if the damages are calculated
without reference to income tax that will not be so. Suppose the damages are
sufficient to buy an ordinary annuity for her life of that amount. Part of each
year’s annuity payment will be a return of capital and will not be taxable: but
that part which is truly income will have to bear tax. So the amount available
to her to spend each year will fall short of what it should be by the amount of
that tax. The damages will therefore have to be increased by an amount
necessary to counteract this short-fall.
But, despite the last sentence above, it is
misleading to say that the damages were increased by the amount of tax payable.
The adjustment for the incidence of tax was not a direct addition but an
indirect adjustment by increasing the dependency or the multiplier to be
applied to it to produce the lump sum damages. This decision gives some support
to Mr Jones’ submissions, probably more so than Lowes.
The other case is the decision of this tribunal
(VG Wellings QC and WM Hall) in Alfred Golightly & Sons Ltd v Durham
County Council [1981] 2 EGLR 190*, where a claim was successfully made for
compensation for development land tax (DLT) payable by deduction by the
claimant. This was a reference by consent to determine the price for the
purchase of a former colliery with spoil heaps containing coal and other
combustible material. The price under the purchase agreement comprised the
market value of the land and the value of minerals. It was to be assessed as if
the sale were a compulsory acquisition.
*Editor’s note: Also reported at (1981) 260 EG
1045, 1135 and 1199
The claimant sought payment for the land and
minerals (before adjustment for DLT) of £285,143 and a further payment under r
6 of section 5 of the 1961 Act of £351,060.76 for the DLT to be deducted by the
county council from the price. The consideration was grossed up to allow for
the incidence of both DLT and CGT. The total claim was £636,203.76.
In order to understand this decision it is
necessary to know a little about DLT, which was in force between 1976 and 1985.
The scheme of the Development Land Tax Act 1976 (the 1976 Act) was to tax the
realised development value arising on the disposal or deemed disposal of land
by the start of material development. Realised development value comprised the
net proceeds of sale less the highest of three base values. It was essentially
value in excess of current use value. Three sections of the 1976 Act are
particularly relevant. Section 17 provided that DLT was not payable in respect
of material development consisting of the winning or working of minerals. On
the disposal of mineral-bearing land half the mineral value was exempt from
DLT. Under section 39, where land was sold to a local authority or other body
possessing compulsory purchase powers, the tax was deducted from the
consideration payable. Thus, the vendor received a net sum and was credited
with payment of the DLT deducted, the two amounts totalling the full
consideration. Under section 4(5) the consideration could be apportioned to
exclude the disturbance element. The Act contained complex provisions to avoid
double taxation arising out of the relationship between DLT and CGT and other
taxes.
Against this background, I look at the decision in
Golightly. Counsel for the authority conceded that, if tax is to be
reimbursed, it would be under "any other matter not directly based on the
value of land" in r 6 and not as disturbance. The tribunal followed Taylor
v O’Connor and accepted that liability for DLT had been caused by the
acquisition, but this should not be calculated by grossing up the consideration
as advocated by the claimant.
To find the compensation for DLT, the tribunal
first calculated the DLT that would have been payable on the realised
development value of the land, £61,430. Next, it considered the incidence of
other taxes and benefits. There would be a liability to corporation tax at a
lower charge (which the tribunal referred to as CGT) on the disposal of the
assets. Under paras 1 and 2 of Schedule 6 to the 1976 Act, the amount of the
chargeable realised development value under DLT would be available
as a deduction from the amount that, apart from this Schedule, would have been
a chargeable gain under CGT. There would also be a liability for corporation
tax on the profits from the working of the minerals. The tribunal also found
that £1,277 loss on an NCB contact should be deducted from the r 6 claim.
The effect of these adjustments was that the claim
for the reimbursement of DLT under r 6 of £61,430 was reduced by £23,001 for
CGT, £33,456 for corporation tax and £1,277 for loss on the NCB contract, to
£3,696. The tribunal said at p199H:
We wish to observe that the net sum which will be
receivable by the claimants in consequence of our award and after deduction
therefrom of development land tax will be equal to the net sum which they would
have received from working the minerals themselves, realising the profits
therefrom and paying corporation tax on those profits.
This decision gives some support to Mr Harris’
claim but it is important to note that the r 6 claim for DLT specifically
excluded the CGT saving in respect of the value of the land and minerals.
Furthermore, it was conceded on behalf of the authority that the claim could be
made under r 6. No claim was made for CGT on the chargeable gain arising out of
the disposal to the county council. The basis of the claim for reimbursement of
DLT was that, under section 17 of the 1976 Act, the claimant could have
recovered the minerals without any liability for DLT and, if it had sold the
land with planning permission to work the minerals, the tax would have been
half the liability. On the compulsory sale the county council were required to
deduct the whole of the DLT and the claimant was required to suffer tax that,
in the absence of the acquisition, it would not have incurred. In this current
reference, however, the effect of the forced sale was not to remove an
exemption to tax, but to turn into an actual liability what already existed as
a contingent liability. The effect of the sale was to bring forward an existing
future liability.
I do not find the Golightly decision
conclusive. In order to determine this claim I must return to the principle of
equivalence and the well-known principles governing compensation for
disturbance and other matters under r 6 of section 5 to the 1961 Act.
The law of compensation and the law of damages are
both governed by a fundamental principle. In compensation this is the principle
of equivalence, as expressed in Horn, or fair compensation, as expressed
in Shun Fung. It requires that the sum awarded should place the claimant
in the same position as if the acquisition or wrong had not occurred. The
principle of equivalence sets out the quantum of compensation, which, in the
words of Scott LJ in Horn at p49:
cannot, and must not, exceed the owner’s total
loss, for, if it does…, it will transgress the principle of equivalence which
is at the root of statutory compensation, the principle that the owner shall be
paid neither less nor more than his loss.
In this reference, Mr Harris had a building worth
£275,000, which he was forced to sell to the authority. He paid CGT of £32,524
and was left with only £242,476. Under the principle of equivalence should he
not receive compensation of £32,524 to restore the cash received for the
property to £275,000?
Notwithstanding the principle of equivalence,
however, and for reasons of expediency and public policy, the courts have
placed limits on the extent of the loss for which compensation or damages can
be awarded: for damages see eg Liesbosch Dredger v SS Edison
[1933] AC 449 per Lord Wright at p460 and Spartan Steel & Alloys
Ltd v Martin & Co (Contractors) Ltd [1972] 3 WLR 502 per
Lord Denning MR at p507G. In Shun Fung, Lord Nicholls referred to the
principle of fair compensation or equivalence and to the principles in Harvey
and said at p126B:
The adverse consequences to a claimant whose land
is taken may extend outwards and onwards a very long way, but fairness does not
require that the acquiring authority shall be responsible ad infinitum. There
is a need to distinguish between adverse consequences which trigger a claim for
compensation and those which do not. A similar problem exists with claims for
damages in other fields. The law describes losses which are irrecoverable for
this reason as too remote.
Three conditions must be satisfied. First, there
must be a causal connection between the acquisition and the loss in question.
Second, the loss must not be too remote. Third, the claimant must have acted
reasonably to mitigate his loss. Although the Court of Appeal in Harvey
and the Privy Council in Shun Fung were concerned with disturbance under
the first limb of r 6, the principles they established can, in my view,
similarly be applied to "any other matter" under the second limb of
the rule.
Equivalence and the limits of compensatable loss
are relevant to Mr Harris’ claim for reimbursement of CGT but, in my view,
there is a prior question to be answered. Mr Jones bases this claim on the
second limb of r 6 of section 5 of the 1961 Act. The prior question is whether
this claim properly falls within this provision. If it does, it is then
necessary to consider whether it satisfies the three conditions outlined in the
previous paragraph. If it does not, then the claim must fail at this initial
stage: it cannot be a compensatable loss because the statutory code of
compensation does not cover this particular loss.
I look first at the scope of r 6. I agree with Mr
Jones that the second limb of r 6 is the only head of statutory compensation
under which this particular claim could be made, if it can be made at all.
Clearly, it cannot be made under compensation for land taken or for severance
and injurious affection. It cannot be made under disturbance, the first limb of
r 6, because disturbance can only arise out of dispossession and, although Mr
Harris in his business capacity has been dispossessed from 60 Castle Street and
properly has a claim for business disturbance, this particular claim arises out
of his ownership and disposal of this property. It can only arise, if at all,
as "any other matter not directly based on the value of land". Unlike
disturbance it is not necessary that the claimant shall have been dispossessed
from the occupation of the land taken: see Wrexham Maelor per Ralph
Gibson LJ at pp31F and 33F. A claim under the second limb of r 6 can be made by
an owner not in occupation, in this case by Mr Harris as owner holding 60-60A
Castle Street partly as an investment.
There is, however, a major obstacle to the
admission of this claim under r 6, namely the nature of the loss (CGT) for
which compensation is claimed. Rule 6 limits compensation to "any other
matter not directly based on the value of land" (my emphasis). Is
the CGT for which Mr Harris is claiming compensation a "matter not
directly based on the value of land"?
The acquisition of 60-60A Castle Street was a
disposal for CGT purposes. It raised a potential liability for this tax. This
potential liability became an actual liability due to the change in the value
of the property and Mr Harris’ inability to take advantage of the rollover
relief under section 247 of the 1992 Act. Although I was not given details of
the CGT computation, the sale price must have exceeded the cost of acquisition
and other allowance expenses and possibly the indexation allowance to produce a
chargeable gain subject to tax. In essence, a CGT liability arises, and can
only arise, because there has been an increase in the value of the property
since purchase (or 1982) that is greater than inflation (the indexation
allowance) and the cost of any improvements and incidental expenses. It is
therefore, in my view, a matter directly based on the value of land and not
within r 6. Although this is a personal loss suffered by Mr Harris it cannot,
due to the way in which it is quantified, be said to be "a matter not
directly based on the value of land". My decision is that, as a matter of
law, Mr Harris cannot recover as compensation within r 6 of section 5 of the
1961 Act for CGT incurred on the disposal of 60-60A Castle Street to the
authority. This disposes of this head of claim, but I will consider the other
conditions that would still need to be satisfied if this claim is to succeed.
These are questions of fact.
The first condition is that there must be a causal
connection between the acquisition and loss in question (CGT) or, as expressed
by Denning and Romer LJJ in Harvey, the loss must be the natural, direct
and reasonable consequence of the acquisition. The acquisition was a disposal for
CGT purposes. The effect was to convert a contingent
as a compensatable loss, was not caused by the acquisition but arose out of the
existing state of affairs surrounding Mr Harris’ purchase and improvement of
the property, which established the amount of tax payable. The natural and
direct consequence of the acquisition, and the extent of the causal connection
between acquisition and loss, was that it constituted a CGT disposal. Any
liability arising out of that disposal was caused by Mr Harris’ position in
relation to the property. There is therefore a break in the chain of causation
between acquisition and loss.
Furthermore, I do not consider that the loss
claimed was the reasonable consequence of the acquisition. I will deal with the
calculation of the true loss in more detail under the second condition of
remoteness, but I cannot accept as reasonable the proposition that Mr Harris
should be entirely relieved of the whole of his tax liability by the authority.
He would recover more than his loss, which already existed as a contingent
liability independently of the compulsory purchase. If the whole of his tax is
reimbursed as compensation he would be in a better financial position than if
he had taken advantage of the rollover relief under section 247 of the 1992
Act. This cannot be right. I find that the first condition is not satisfied.
The second condition is that the loss must not be
too remote. This is similar to the first condition. Remoteness of loss is a
vague, all-embracing term used to limit the losses that a claimant may recover.
As Lord Nicholls observed in Shun Fung at p126D:
The familiar and perennial difficulty lies in
attempting to formulate clear practical guidance on the criteria by which
remoteness is to be judged in the infinitely different sets of circumstances
which arise.
Some of these criteria overlap with the first
condition, the need for a causal connection between acquisition and loss: see Bibby
per Megaw LJ at p65. Remoteness may also arise in the context of
certainty of loss. A loss may be beyond the limits of recoverable compensation
because it is too speculative, too contingent or incapable of assessment.
Examples of compensation losses held to be too remote are to be found in R
v Poulter (1887) 20 QBD 132; Re Tynemouth Corporation and the Duke of
Northumberland (1903) 89 LT 557; Re Clarke and Wandsworth District Board
of Works (1868) 17 LT 549; and Re Kilworth Rifle Range [1899] 2 IrR
305.
In this reference, I find that the claim for CGT
is too remote because it is incapable of accurate assessment. As explained
above, I cannot accept that Mr Harris should receive as compensation the whole
of the tax paid, thus relieving him of a contingent liability that existed
independently of the acquisition and putting him in a better financial position
than if he had purchased another property and deferred his gain under section
247 of the 1992 Act. He would receive a benefit at the expense of the
authority. It can be said that Mr Harris’ CGT liability has been accelerated by
the acquisition and therefore the extent of his loss is the difference between
the payment of tax made at the time it was made and a payment at some future
date when the property might have been sold. The identification of this future
date is an impossible task. Another solution to this problem would be to
increase the compensation by the present value of the lost rental income due to
the reduction of compensation by the payment of CGT. This also suffers from the
impossibility of estimating the date when a sale would have occurred, in the
absence of the acquisition, to enable the present value of the lost income to
be calculated. Perhaps a robust approach could be adopted by reducing the CGT
paid by an arbitrary amount. But what is this amount to be? This claim is too
remote because it is incapable of quantification. In my view, the only solution
to this problem that comes near to being satisfactory is the provision for
rollover relief in section 247 of the 1992 Act. This was introduced by section
83 of the Finance Act 1982 and was, no doubt, intended by parliament to deal
with this particular problem, for which no compensation provision existed.
The third condition is that Mr Harris must have
acted reasonably to mitigate his loss. Mr Harris could have mitigated his tax
liability by applying the whole or part of the consideration in the purchase of
another property and claiming rollover relief. It was not part of Mr Jarman’s
case that Mr Harris should have taken this course of action, although he
submitted in answer to the cost of works claim that he should have relocated
into a property other than 93 Cardiff Road. I have little evidence on this
matter, but, if it had been necessary to do so, I would have found that Mr
Harris did not fail to act reasonably to mitigate his loss by not acquiring
another freehold property and claiming rollover relief. I am satisfied that Mr
Harris was aware of this relief, that he considered freehold properties for
relocation and that he sought to buy the freehold of 93 Cardiff Road. Although
he was unsuccessful, I am satisfied that he acted reasonably in an attempt to
mitigate his loss. The third condition is satisfied.
I have held this claim does not fall within the
second limb of r 6 of section 5 of the 1961 Act and is therefore not a
compensatable loss. No compensation is awarded under this head of claim. This
is a decision on a question of law. I am required by r 50(4) of the Lands
Tribunal Rules 1996 to make an alternative award if I had come to a different
decision on this point of law. If I had decided that the claim fell within r 6,
then it would still have been necessary for the claim to satisfy the three
conditions of causation, remoteness and reasonableness (mitigation). I have
considered these conditions and, as explained above, have found that the claim
fails to satisfy the conditions of causation and remoteness. The claim would
have failed on these grounds. I would have awarded no compensation for CGT even
if this had been an admissible claim under r 6. My alternative aware under r
50(4) is also nil.
Before leaving this head of claim I should deal
with two points raised in submissions and evidence on behalf of the authority.
Mr Jarman said that this claim is excluded under r 1 of section 5 of the 1961
Act ("no allowance shall be made on account of the acquisition being
compulsory"). I do not agree. This argument was put forward in Harvey
v Crawley Development Corporation in an attempt to exclude losses and
expenses from a disturbance claim. Denning LJ said at p493:
Next it was said that Mrs Harvey was really
seeking compensation for the acquisition being compulsory, and rule (1) was
referred to… Rule (1) is, however, only directed to the added sop (which was
in the old days always given in these cases) of 10 per cent to soften the blow
of compulsory acquisition. Rule (1) disallows that 10 per cent. It leaves
untouched the rule that everything which is a direct consequence of the
compulsory acquisition can be recovered under the head of "compensation
for disturbance".
The second point is that Mr Jones said in evidence
that 60-60A Castle Street is not shown in the accounts of Lawrence & Harris
and therefore no CGT claim should be made. I do not agree. The claimant is Mr
Harris in his dual capacity of a sole trader running an optician’s business and
as owner of 60-60A Castle Street. His claim for CGT is made in this latter
capacity and is not excluded because it does not relate to the business. Mr
Jones also said that the profit on the sale of 60-60A Castle Street should be
brought into account. This profit is a matter wholly outside this claim. This
profit arose out of the ownership of the property by Mr Harris and is different
in character to a benefit that arises out of the acquisition such as the
increased profits arising out of relocation. Mr Harris is not required to bring
this profit into account to offset his compensation.
This head of claim is a particularly difficult one
to decide. I am satisfied that Mr Harris has no right to compensation for this
loss under the compensation code. Parliament has given a remedy to claimants in
this situation in the rollover relief under section 247 of the 1992 Act. Mr
Harris has not been able to use this remedy and therefore his loss remains with
him and cannot be reimbursed by the authority.
Conclusion
I have made no award for the cost of the works
carried out at 93 Cardiff Road nor in respect of CGT. I have awarded £8,300 for
Mr Harris’ time and £10,966 for loss of profits. Compensation for the
acquisition of the freehold of 60-60A Castle Street has been agreed at £275,000
and other items of disturbance have been agreed at £65,804.86. The total
compensation is £360,070.86, which I round up to £360,100.
I determine the total compensation payable to the
claimant by the authority for the compulsory acquisition of 60-60A Castle
Street,
Caerphilly) Compulsory Purchase Order 1989 to be the sum of £360,100 (three
hundred and sixty thousand, one hundred pounds) plus surveyors’ fees under
Ryde’s Scale.
This decision so far concludes my determination of
the substantive issues in this reference. It will take effect as a decision
when the question of costs is decided, and, at that point, but not before, the
provisions relating to the right of appeal in section 3(4) of the Lands
Tribunal Act 1949 and Ord 61 r 1(1) of the Civil Procedure Rules will come into
operation. The parties are invited to make submissions as to the costs of this
reference and a letter accompanying this decision sets out the procedure for
submissions in writing.
Addendum
I have received written submissions on costs. On
22 October 1997 the acquiring authority made an offer in respect of compensation
for disturbance that was higher than my award. They seek their costs from the
date of this offer. The authority also ask for their costs up to this date, on
the grounds that they were substantially successful on the matters that
remained the subject of disagreement at the hearing and that the claim might
well have been settled at an early stage if it had been presented in a more
intelligible, detailed and realistic form.
The claimant accepts that he is liable for the
authority’s costs after the offer, but contends that his liability should
commence 14 days from the date of this offer. He seeks his costs up to that
date.
It is common ground that the claimant should pay
the authority’s costs after the offer, and I agree that his liability should
run from the date 14 days after the offer. As to costs before this date, I am
not persuaded that I should deprive the claimant of his costs for the short
period of the reference before the offer.
I order the authority to pay the claimant’s costs
of the reference up to 5 November 1997 and order the claimant to pay the
authority’s costs of the reference after that date, all such costs, if not
agreed, to be the subject of a detailed assessment on the standard basis by the
Registrar of the Lands Tribunal in accordance with rr 44.4 and 44.7 of the
Civil Procedure Rules. The procedure laid down in r 52 of the Lands Tribunal
Rules 1996 will apply to such detailed assessment.
