Town and Country Planning Act 1971, sections 169(2) and 178(1) — Compensation — Refusal of planning permission to carry out development of a class specified in Part II of Schedule 8 to the Act — Application to construct a penthouse flat on the top of a block of flats — Appeal from decision of the Lands Tribunal — Valuation problems — Developer’s profit and risk — No error of law — Tribute to skeleton arguments
of compensation arose from the refusal of the local planning authority, upheld
by the Secretary of State for the Environment, to give permission to the
applicants who owned the freehold of a block of flats to enlarge the block by
the construction of a penthouse flat on the top — The authority’s refusal led
to a claim by the applicants for compensation under section 169(2) of the 1971
Act based on the difference in the value of the claimants’ interest caused by the
refusal — As there was a failure to agree on the valuation the matter came
before the Lands Tribunal — It was agreed that the relevant date for the
assessment of compensation was January 18 1985, the date when the Secretary of
State dismissed the claimants’ appeal against the refusal — It was also agreed
that, as rule (2) in section 5 of the Land Compensation Act 1961 was applied by
section 178(2) of the 1971 Act, the valuer had to arrive at the market value of
the whole of the claimants’ interest with and without the benefit of the
planning permission
hearing before the Lands Tribunal it was agreed that the most useful way to
decide whether the permission would have given an added value to the block was
to carry out a residual valuation of the penthouse flat itself on the
hypothesis that it had been erected and put on the market — This involved
calculating the cost of construction and the cost of sale and any other
relevant items and comparing the total with the value likely to be obtained by
a sale of the flat on the open market — It was in respect of the items to be
set against the expected market value that the difference leading to the
present appeal arose — Subject to this difference, the figures raised no
special point — The tribunal put the sale price of the flat at £200,000, the
total costs at £187,163.50, leaving a balance of £12,836.50, scaled down to
£12,200 — It had, however, been submitted by the compensating authority that
there should have been included in the sum to be set against the market price
an amount representing the profit which a developer of the flat would require
and something to compensate him for the risk he would take — It was suggested
that this amount would be £32,000, which, if added to the costs of £187,000
odd, would be more than the sale price of £200,000 — It would follow that the
right to develop would have no market value and that, accordingly, no
compensation would be payable — The tribunal member (Mr V G Wellings QC)
rejected this submission — He held that the hypothetical purchaser would be a
company very similar to the claimants, if not the claimants themselves — Such a
company would not employ developers and the risk would be comprehended in the
sale price — The tribunal therefore disallowed the additional item of £32,000
or any sum for developer’s profit or risk — The authority appealed
the tribunal’s decision was attacked by the authority as wrong in law — It was
argued that a developer would want to know what profit or benefit he was going
to derive before he made any bid for the flat — The court, however, could find
no fault with the decision — Dillon LJ, commenting on the authority’s argument,
saw no necessity to assume a sale to a purchaser who would want to resell at a
substantial profit as soon as he had built the hypothetical penthouse — Rule
(2) did not require the assumption of two open market sales — If planning
permission had been given, the entire benefit of implementing it would have
accrued to the claimants and they were being awarded compensation for being
deprived of it — Nothing in the legislation required that the benefit should be
attributed, as a result of a valuation exercise, not to the claimants but to
some hypothetical purchaser brought in for the purpose of valuation — Appeal dismissed
No cases are
referred to in this report.
This was an
appeal by the London Borough of Richmond from the decision of the Lands
Tribunal [1988] 1 PLR 33 (Mr V G Wellings QC) in regard to the compensation
payable to the respondents, a company owning the freehold of a block of flats,
known as Meadowside, Cambridge Park, Twickenham, following the refusal of the
respondents’ application for planning permission to build a penthouse flat on
the top of the block.
J C Harper
(instructed by Mr G R Cheesman, solicitors’ department, Richmond upon Thames
Borough Council) appeared on behalf of the appellant council; John B Steel
(instructed by Green David Conway & Co) represented the respondents.
Giving the
first judgment at the invitation of Dillon LJ, GLIDEWELL LJ said: The fact that
we are giving judgment in this case 45 minutes after the hearing of the appeal
opened is a tribute to the increasing adoption of the practice of depositing
skeleton arguments with the court before the hearing and to the excellence of the
skeleton arguments which have been drawn up by counsel to both parties in this
case. The court has been able to appreciate from those skeleton arguments what
the points in issue are, and Mr Harper has been able to make his points in his
oral argument and in answer to our interjections lucidly and with his usual
skill.
At the
material time — that is to say on January 18 1985 — the respondent company
owned the freehold of a block of flats known as Meadowside, Cambridge Park,
Twickenham, in the London Borough of Richmond. The flats were erected in 1936,
long before July 1 1948, the appointed day on which the Town and Country
Planning Act 1947 came into force.
On February 9
1984 the company applied for planning permission to enlarge the block by the
construction of a penthouse flat on the top. On May 15 1984 that application
was refused by the Richmond London Borough Council, the relevant planning
authority. The company appealed and on January 18 1985 the Secretary of State
for the Environment dismissed their appeal. It is agreed that for the purposes
of compensation, which is the subject of this appeal, that is the relevant date
at which compensation, if any, is to be assessed.
Section 169 of
the Town and Country Planning Act 1971 gives a right to compensation where
planning permission is refused for development within any of the categories
specified in Part II of Schedule 8 to the Act. One of the vital criteria under
that part of that Schedule is that the building must have been in existence on
July 1 1948, as this building was. The proposed development, as is agreed on
all sides, was within one of the classes of development described in para 3 of
Schedule 8 to the Act.
Accordingly,
there arose a right to compensation, the basis of compensation being set out in
section 169(2) of the Act. That provides that:
if, on a claim made to the local planning
authority within the time and in the manner prescribed by regulations under
this Act, it is shown that the value of the interest of any person in the land
is less than it would have been if the permission had been granted, . . . the
local planning authority shall pay to that person compensation of an amount
equal to the difference.
So the basic
exercise which the valuer and then, there being a disagreement, the Lands Tribunal
had to carry out was to value as at January 18 1985 the value of the company’s
interest in the whole of the block of flats (Meadowside) respectively with and
without the benefit of the planning permission for the penthouse flat. If, as
the
would have been greater than without such permission, the difference was the
amount of compensation.
That still
leaves the question: on what basis does one assess that difference? The question is partly answered by section
178(1) of the 1971 Act, which provides that:
for the purpose of assessing any
compensation to which this section applies, the rules set out in section 5 of
the Land Compensation Act 1961 shall, so far as applicable and subject to any
necessary modifications, have effect . . . for the purpose of assessing
compensation for the compulsory acquisition of an interest in land.
By subsection (2):
This section applies to any compensation
which, under the preceding provisions of this Part of this Act . . . is payable
in respect of depreciation of the value of an interest in land.
Section 169 is
part of Part VIII of the Act to which section 178(2) applies. So one has to
look at section 5 of the Land Compensation Act 1961 to see which, if any, of
the rules contained in that section are applicable with any necessary
modifications. The only one which does apply is rule (2), the well-known rule
which provides that ‘the value of land shall . . . be taken to be the amount
which the land if sold in the open market by a willing seller might be expected
to realise’.
This is, of
course, a hypothetical exercise, because there is no compulsory purchaser here.
What, it is submitted by Mr Harper and I think agreed by Mr Steel for the
claimants, must be assumed is that the valuer has to arrive at a market value
for the whole of the claimants’ interest — that is to say, the freehold in
Meadowside — at the relevant date respectively with and without the benefit of
the planning permission.
The district
valuer, Mr D A Russell-Smith [BSc ARICS], who gave evidence on behalf of the
compensating authority in this case, as I understand it from the decision of
the member of the tribunal, carried out a total valuation in which he valued
the block of flats as a whole and then sought to decide whether the planning
permission for the flat on the top added to the value of the block as it stood
or not. He concluded that it did not for reasons I shall come to in a moment.
It was,
however, agreed at the hearing that the most useful way to seek to decide
whether the planning permission gave an added value to the block or not was to
carry out a residual valuation of the penthouse flat itself, that is to say, to
value the penthouse flat had it been erected and put on the market, and to
calculate the cost of construction and the cost of sale and so forth. Adding
the total costs together, if they proved to be less than the value which could
be achieved on a sale on the open market, the difference, it was generally
agreed save for the point which is at issue in this appeal, gave at least a
lead to the extra value in the block as a whole.
Much of the
cost of construction was agreed. There were some figures which were not agreed.
In the event the tribunal’s valuation was as follows: the sale price of the
penthouse flat would be £200,000; the total costs would be £187,163.50; and
there was left a balance of £12,836.50. That, however, was to be scaled down to
take account of the well-known fact that the sale of a block of property as a
whole will not necessarily achieve exactly the total of the relevant purchase
prices of all the constituent parts, so in the event the member of the tribunal
assessed the compensation at £12,200.
During the
course of the hearing Mr Russell-Smith gave evidence that there should be
included in the sum to be set against the market price for the flat a sum
representing the profit which a developer of the flat would want and something
to compensate him for the risk he would take. In other words, Mr Russell-Smith
was making the point which Mr Harper has made very clearly, both in his
skeleton argument and before us, that on the assumption which the valuer had to
make that the block, including the flat, was being put up for sale in the open
market, nobody would purchase the flat or pay anything for the right to develop
the flat unless that potential purchaser was satisfied that he was going to
derive some profit or benefit from that exercise. So, said Mr Russell-Smith,
one ought to add to the costs a sum for that profit or benefit of development
and he would pay a price only if, having added that profit or benefit, there
still remained a balance of the difference between the notional price and the
total costs plus profit and benefit. He assessed the profit and benefit at
£32,000, and if one adds that to the £187,000 odd, of course it is immediately
apparent that the resultant sum exceeds £200,000. So Mr Russell-Smith’s
argument was that nobody would purchase, would pay anything, for the right to
develop in this case.
The fact that
at first sight it is a somewhat surprising proposition that a right to build a
flat on the top of an existing block with a view over the Thames in the Borough
of Richmond upon Thames has no value at all does not necessarily mean that it
is wrong in law. However, it means one approaches the proposition with a little
scepticism.
The learned
member referred to Mr Russell-Smith’s evidence and then, at the bottom of p 9
of his decision, he referred to the evidence of the valuer for the claimants on
this point in these words:
Mr Phillips thought that there should be
no allowance for developer’s profit because, if the claimants were the sellers,
they would not employ developers. The claimants are a property company
experienced in carrying out developments of the kind postulated at Meadowside.
They employ builders but not developers. Mr Phillips thought that the purchaser
would be a property company similar to the claimants and developers would not
be employed. He also thought there should be no deduction for risk. Both profit
and risk would be comprehended in the selling price.
Later, the member reached his own
conclusion about this matter:
As to developers’ profit and risk, I
accept the evidence of Mr Phillips. It appears to me that the purchaser is
likely to be a company very similar to the claimant company if not the claimant
company itself (it is to be treated as a bidder for the flat). Such a company
would not employ developers. The risk is comprehended in the sale price
achieved. I therefore disallow the additional cost of £32,000 or any sum for
developers’ profit and risk.
Mr Harper
argues that that conclusion is fundamentally wrong as a matter of law.
For my part I
agree that like has to be compared with like and that if what was being
considered, as had to be considered here, was the notional selling of the
freehold in the whole block of flats, and if any purchaser would say, in common
parlance, ‘There is nothing in this for me if I pay anything for the right to
develop the block of flats, so I will not pay anything for it’, then I would
agree that that would lead to the conclusion that there would be no market
value in the right to develop and thus no compensation would follow.
On the way in
which the matter was argued in the tribunal, the tribunal, in my view, was
entirely entitled to conclude that the claimant company would itself be a
potential bidder in the market. The claimant company had, through its managing
director, given evidence that it would be in a position to carry out the
development itself: in the event, it did not do so, but that is nothing to the
point. If the company were to be considered as a potential bidder, in my view
the learned member of the tribunal was justified in concluding that the
claimant company would pay, or be willing to pay, £12,200 in addition to the
rest of the purchase price for the block for the benefit of the planning
permission for the flat, because of course it itself was receiving £12,200 and
thus was, in effect, getting its own profit in that way. It is not the way the
learned member explains it, but that is the logic of what he has concluded.
But before us
the matter was being put rather more firmly by Mr Harper, and the argument
which he has advanced today — a developer would want to know what profit or
what benefit he was going to derive before he made any bid at all for this
property — has been advanced more clearly than it was before the tribunal.
That brings
one back to the basis upon which the notional purchase price for the flat was
assessed. The decision of the tribunal makes it clear that the basis on which
the valuers were valuing the penthouse flat was not as part of the sale of the
freehold of the whole block but, to quote the decision:
. . . the parties have proceeded on the
basis that the claimants retained the freehold thereof but that the proposed
penthouse flat, if built, would have been subject to a lease for 125 years.
If they proceeded on that basis, they
could only have been using this as a guide because they were not actually
valuing that which was going to be disposed of in the theoretical sense; that
which was to be disposed of in the sale was the freehold.
If the
position that was assumed and must be taken to be assumed in the tribunal’s
finding that the £200,000 was the value of a leasehold for 125 years, then
there remained in the claimant company the freehold reversion and the right to
raise a rent for it — a matter which is not dealt with in the decision at all,
because this argument was not advanced there. For myself I see no reason why
that part of it which, on the theoretical sale of the freehold, would inure to
the purchaser should not be sufficient to persuade the purchaser to purchase
and to pay £12,200 for the benefit of the planning permission. I appreciate
that that point does not come through from the decision because, as I
have said, the matter was not argued in precisely the same way in the court
below, but that it is to be deduced from the basis of the valuation seems to me
to be clear.
Accordingly,
for that reason also, I take the view that the learned member of the tribunal
was entirely justified in coming to the conclusion to which he came. I find no
fault in law in his approach. The right of appeal to this court, and indeed the
right to challenge his decision, is of course on a point of law only, and
accordingly I would dismiss this appeal.
RUSSELL LJ
agreed and did not add anything.
Also agreeing,
DILLON LJ said: I add a few words only of my own.
Rule (2) in
section 5 of the Land Compensation Act 1961 provides for ‘the value of land . .
. to be taken to be the amount which the land if sold in the open market by a
willing seller might be expected to realise’. That has to be applied, so far as
applicable and subject to any necessary modification, to the valuation in the
present case of Meadowside or the space for the desired penthouse — on the
facts it matters not which — with the benefit of the desired planning
permission for the construction of the penthouse: see section 178 of the Town
and Country Planning Act 1971.
But there is
no actual market in planning permissions for the construction of penthouses on
other people’s blocks of flats, or anything of that nature, and therefore it
has been common ground that the open market value can be ascertained only by
valuing the penthouse when constructed and deducting the cost of construction
with agreed adjustments not in issue on this appeal.
This satisfies
to my mind the open market requirements of rule (2) so far as is applicable to
the present case. I see no necessity to assume a sale to a purchaser now who
will himself want to resell at a substantial profit to himself as soon as he
has built the hypothetical penthouse. The incorporation of rule (2) in the
qualifying way I have mentioned by section 178 does not require the assumption
of two open market sales. If the planning permission had been granted, the
entire benefit of implementing it would have accrued to the present
respondents. That is what the Lands Tribunal has awarded them compensation for.
As the
planning permission was refused, the respondents are deprived of their benefit.
I see nothing
in the Acts to require that benefit to be attributed, as a result of a
valuation exercise, not to the respondents, but either entirely or in a
substantial part to some hypothetical purchaser brought in for the purposes of
valuation.
I also would
dismiss this appeal.
The appeal was dismissed with costs.