Lloyds Banking Group plc v Burnley Borough Council

Compulsory purchase – Compensation – Mortgage – Mortgagor acquiring long leasehold interest in property – Applicant bank granted mortgage over property – Property damaged by tenants and falling into disrepair – Respondent local authority acquiring property by compulsorily purchase – Value less than outstanding mortgage debt – Borrowing mortgagor failing to agree level of compensation – Applicant making reference to Upper Tribunal to determine compensation payable – Compensation determined accordingly In May 2006, G bought the 999-year long-leasehold interest in a property known as 28 Spenser Street, Padiham, Burnley, for £67,500. In March 2008, he mortgaged the property, granting the applicant bank a first legal charge over it. The property was subsequently damaged by tenants. Falling into further disrepair, it came to the notice of the empty housing team of the respondent acquiring authority, which took a proactive approach to bringing dilapidated housing back into use. During their inspection, the respondent’s officers found evidence of damp, water damage to ceilings, and general dilapidation. They concluded that only full refurbishment could bring the property back into habitable condition. The respondent corresponded with G who acknowledged the property’s poor condition but said he did not have the funds to repair it. The respondent offered to buy the property, but at a price which was less than the bank’s outstanding mortgage, and communications between it and G tailed off. In March 2022, the respondent advised the appellant that owing to the property’s poor condition, a recommendation would be made to acquire it compulsorily and it subsequently made a general vesting declaration under section 4 of the Compulsory Purchase (Vesting Declarations) Act 1981. The property was vested in the respondent on 13 September 2022 which was the valuation date for the purpose of calculating compensation payable to G. The applicant made a reference to the Upper Tribunal to determine the compensation payable under section 15 of the Compulsory Purchase Act 1965. Held: The compensation was determined accordingly. (1) Where, as here, the borrowing mortgagor had not agreed the level of compensation nor taken any part in the proceedings, it was not open to the mortgagee and the acquiring authority simply to settle the level of compensation. Section 15 of the 1965 Act provided that if the value of any such mortgaged land was less than the principal, interest and costs secured on the land, the value of the land, or the compensation to be paid by the acquiring authority in respect of the land, should be settled by agreement between the mortgagee and the person entitled to the equity of redemption on the one part, and the acquiring authority on the other part or, if they failed to agree, should be determined by the Upper Tribunal. The amount so agreed or awarded should be paid by the acquiring authority to the mortgagee in satisfaction or part satisfaction of his mortgage debt. (2)  In the present case, there were four comparable transactions. It was clear from the plan attached to the compulsory purchase order that they were all in the same terrace, and therefore no adjustment was required for location when comparing one against another. Neither valuer made any adjustment for a change in levels of value over the (narrow) window of time in which the sales of the comparables properties took place. From the evidence, a report by an experienced valuer familiar with the area stated that the values of two-bedroomed properties in good condition lay in the range of £87,000-£90,000, and the subject property was put at £90,000 on that basis, although the subject property had three bedrooms, albeit two of them were small. It was misleading to simply deduct the cost of refurbishment work (which in seeking the CPO the authority had put at around £35,000) from a refurbished value to arrive at a value in poor condition. The market seemed more nuanced than that. It appeared that developer/landlords were prepared to spend time and effort refurbishing a property with a view to letting it, without the need to immediately cover their costs. (3) There appeared to be force in the evidence that properties in poor condition were sought after, one property selling within days of being marketed. That was the best comparable sale, being in similar condition to the subject property, put on the market within days of the valuation date, and selling shortly thereafter at £72,500. But it had been cleared and deep-cleaned. In my view his valuation at £70,000 was sound. Therefore, the value of the subject property would be determined at the valuation date at £70,000. On the evidence, the tribunal was satisfied that the mortgagor had chosen not to participate in the negotiations or the reference. The applicant had made a valid claim under 15(1) of the Act and, under section 15(2) compensation of £70,000, plus any statutory interest, should be paid to the applicant in part satisfaction of the mortgage debt secured against the property. The compensation was determined under the tribunal’s written representation procedure. Eileen O’Grady, barrister Click here to read a transcript of Lloyds Banking Group plc v Burnley Borough Council