Compensation for the acquisition of land –– Rule 6 of section 5 of Land Compensation Act 1961 –– Holding costs –– Sale of property frustrated by threat of compulsory acquisition –– Claimant incurring interest on borrowed money –– Whether holding costs compensatable under r 6
In November 1988 the claimant property developer acquired a building site and erected 37 flats, four bungalows and a warden’s bungalow, which it intended to sell as retirement homes. The claimant encountered problems in selling the homes because of the state of the market in 1989 and 1990 and decided to let the units on a short-term basis. The acquiring authority later required the claimant’s property for the Croydon Tramlink scheme. The parties agreed that had it not been for the tram scheme, the claimant would have been able to sell the individual units, or the development as a whole, on 25 March 1993. The agreed date of entry was 8 August 1997. The claimant sought compensation under r 6 of section 5 of the Land Compensation Act 1961 for the costs of holding the property between 25 March 1993 and 8 August 1997, in a claim based upon the interest payable by the claimant between these two dates for borrowing money to buy the site and erect the buildings. The claim for holding costs was ordered to be heard as a preliminary issue. The parties agreed an approach to the valuation of the holding costs that involved, first, finding the value at which the property would have sold on 25 March 1993, adding interest for the period 25 March 1993 to 8 August 1997 (less net rents reasonably achievable for that period), and setting off the resulting sum against the r 2 value on 8 August 1997. Any positive figure would represent holding costs.
Decision: There was no difference in principle between the holding costs claimed by the claimant and the losses during the “shadow period” held to be compensatable in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 1 EGLR 19. The holding costs, if they turned out to be losses, were losses caused by the threat of dispossession, and, as a matter of law, there was a sufficient causal connection with the compulsory acquisition. It was obviously foreseeable, likely, probable or natural that the claimant’s proposals to market the retirement homes would be frustrated by the threat to acquire the properties compulsorily.
The following cases are referred to in this report.
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
Prasad v Wolverhampton Borough Council [1983] Ch 333; [1983] 2 WLR 946; [1983] 2 All ER 140; (1983) 82 LGR 265; 47 P&CR 252; [1983] 1 EGLR 10; 265 EG 1073, CA
Christopher Katkowski QC and Timothy Mould (instructed by Argles Stoneham Burstows, of Maidstone) appeared for the claimant; David Elvin QC and Kate Olley (instructed by the solicitor to London Regional Transport) represented the acquiring authority.
Giving the decision of the tribunal, JUDGE RICH QC said:
Issues
The claimant claims compensation upon the compulsory acquisition of its freehold interest in 37 flats and four bungalows, all erected as retirement homes, together with a fifth bungalow for the use of a warden, known as Evelyn Court and Evelyn Mews, Teevan Close, Addiscombe, Croydon. The acquiring authority exercised its powers in order to demolish the dwellings and construct on its site a tramway as part of the Tramlink scheme for Croydon.
Among the heads of claim included in the notice of reference was “Holding costs pursuant to Section 5 Rule 6 of the Land Compensation Act 1961 in the sum of £482,944”. This was computed as the interest payable by the claimant for borrowing money to buy the site on 29 November 1988 and to erect the dwellings thereon, from the date when it claimed that it would, but for the authority’s scheme, have disposed either of the individual dwellings or of the whole site, until the date when the authority took possession, upon which date the market value of the premises falls to be assessed.
By order dated 25 September 2000, I ordered that the claim for holding costs should be tried as a preliminary issue. In preparation therefor, the parties agreed a number of facts that, providing that the actual computation of the “holding costs” was postponed, made the calling of any evidence unnecessary. At the request of the parties, I was therefore content to determine only matters of principle in regard to the entitlement to, and computation of, the holding costs claimed, rather than the whole claim in regard to such costs, as originally ordered.
I have already recited some of the facts as agreed, but those of most direct relevance to the issue now falling for determination were set out as “matters agreed” in para 9 of the agreed statement. These are to be found at Appendix 1 of this decision.
Counsel also identified three issues for decision of the tribunal, of which the second and third were directed to the principles of calculation of the loss resulting to the claimant as a result of any impossibility of disposing of the premises at the date when it would, but for the scheme, have done so. In a skeleton argument prepared for the hearing, however, counsel for the claimant accepted that the assessment of the “holding costs” would have to take account of the price that would have been realised upon such sale as the claimant would have made, but for the exercise of the compulsory powers, as compared with the market value assessed at the valuation date, as well as the net cost of being kept out of such proceeds of sale for the relevant period. The net cost would, of course, have to take into account the net proceeds of lettings of the dwellings during such period. After I had heard argument on the sole issue to which this decision is now directed, I therefore gave the parties an opportunity to discuss further the basis for assessment of “holding costs”, if, as a matter of law, they were, in the circumstances of this
The sole issue for the determination of the tribunal upon this preliminary issue is therefore whether, as a matter of law, the claimant is entitled to recover its holding costs (to be assessed in accordance with the agreed approach to valuation) incurred in the period from 25 March 1993 to the date of entry (agreed as 8 August 1997).
Facts
It appears to me that the crucial facts among those that, after careful examination of the claimant’s proposed evidence, the parties have been able to agree, are:
9.1 The nature of [the claimant’s] business is that of a property developer developing properties for onward sale.
9.2 The problems encountered by [the claimant] in selling the individual units upon completion were occasioned by the state of the market in 1989 and 1990 onwards.
9.4 Had it not been for the Tramlink scheme and the CPO, eventually [the claimant] would have been able to sell the individual units or the development as a whole.
9.5 But for the scheme the property would have been sold on 25th March 1993… [9.6] with vacant possession…
Mr David Elvin QC, for the acquiring authority, sought to persuade me that this agreement went no further than an admission on the part of the authority that the sale was inhibited by the “scheme” to construct a tramway system in Croydon. The only effect of that scheme upon the subject premises, however, was that they would have to be acquired and demolished in order to allow the tramway to be constructed. In my judgment, the only proper inference from the agreement is that whereas, prior to that date, market conditions made sales difficult, it was the threat of the acquisition under compulsory powers, making the dwellings unsuitable for purchase as retirement homes, that prevented the sale of the property that would otherwise have taken place on 25 March 1993. It is upon the basis of such facts that I will determine the agreed issue.
Decision
It is common ground that entitlement to be compensated for loss upon compulsory acquisition of land is to be determined in accordance with the decision of the majority of the Privy Council in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111*. At p137H Lord Nicholls of Birkenhead, speaking for the majority, expressed the principle thus (in the context of the law of Hong Kong, which was held otherwise to be the same as English law, compulsory acquisition is referred to as “resumption”):
To qualify for compensation a loss suffered post-resumption must satisfy the three conditions of being causally connected, not too remote, and not a loss which a reasonable person would have avoided. A loss sustained post-scheme and pre-resumption will not fail for lack of causal connection by reason only that the loss arose before resumption, provided it arose in anticipation of resumption and because of the threat which resumption presented.
* Editor’s note: Also reported at [1995] 1 EGLR 19
The acceptance that the acquisition could cause events that preceded it, because the subsequent event throws its shadow before it, was consistent with the decision of the Court of Appeal in Prasad v Wolverhampton Borough Council [1983] Ch 333*, which the Privy Council expressly approved at p139.
* Editor’s note: Also reported at [1983] 1 EGLR 10
In approving Prasad, however, they added:
… Stephenson LJ’s observation in [that] case at p137, that loss of medical practice by Dr Prasad and his wife due to the threat of impending compulsory purchase was not compensatable, will need reconsideration if this is to be read as an observation of general application.
Mr Christopher Katkowski QC, for the claimant, relies upon this dictum as indicating that any loss of profit caused by the scheme for the purposes of which compulsory powers are exercised is a compensatable loss if the land upon which the loss is suffered is subsequently acquired under compulsory powers.
The observation of Stephenson LJ, to which the Privy Council referred, was that:
Loss of practice due not to his quitting the premises but to the threat of impending compulsory purchase and demolition of the premises will not be compensatable.
This appears to be an acceptance of the submission of Mr Simon Brown, as amicus, at p338D that:
business losses are only recoverable in so far as they follow from vacating the land. Thus, if, dispossession being imminent, a business owner reasonably moves before notice to treat in order to mitigate his anticipated loss, he will be entitled to his reasonable expenses in moving from the land and business losses subsequent to quitting the land. But he cannot recover losses caused by running down the business prior to quitting the land.
That is not a distinction that can stand in the light of the decision in Shun Fung, where the losses that were held to be compensatable did arise, at least in part, from such running down of the business, albeit involuntarily. The claim is explained thus at p135C:
The claimant first became aware that the business was under threat when it received the letter from the government in November 1981. The news spread quickly. During the first half of 1982 the possibility that the claimant’s site might be resumed at some indefinite date became generally known. This had a paralysing effect on the claimant’s operations. The tribunal found that the removal of the business from the land was in the nature of a slow asphyxiation of the claimant. Customers became unwilling to enter into long term forward contracts. Even New World told Hip Hing Ltd, its building subsidiary which took half of all the claimant’s high tensile rebars, to stop entering into new long term contracts with the claimant because of the threat of resumption. For its part the claimant reasonably and properly decided in June 1982 not to enter into contracts of more than six months’ duration. (Emphasis added.)
In the result, in the long drawn out period from November 1981 to January 1987, while operating as best it could under the threat of resumption, the company suffered financially to the extent of $18,173,000. This is the difference between the losses the claimant made in fact and the profits or reduced losses it would have made in this period had there been no threat of resumption.
Although such losses might be categorised as disturbance of the claimant’s business, caused by the shadow of acquisition, I can see no difference, in principle, between the holding costs, as now defined in the subject case, and the losses held to be compensatable in Shun Fung. They are, of course, clearly not disturbance, because they arise from the impossibility of selling the premises, but they are an “other matter not directly based on the value of land” within r 6 of section 5 of the Land Compensation Act 1961. Although, as Mr Elvin points out, that rule does not create, but merely preserves, heads of compensation as they are presumed to have existed in 1919, he very properly accepts that if the costs are losses that fall within the principle defined in Shun Fung they are recoverable.
Of the three conditions that have to be satisfied in order that these costs should fall within that principle, Mr Elvin reserves such points as may be available in respect of whether they are losses that a reasonable person could have avoided to the stage of quantification. On the “Agreed approach to valuation”, the question of the amount of rent that could reasonably have been achieved while the claimant was unable to sell the dwellings is left for agreement or subsequent determination. Mr Elvin, however, contends that the claim ought to be rejected, either as not being causally connected with, or being too remote from, the acquisition or the threat of acquisition.
Mr Elvin relies upon the decision of the majority of the Scottish Court of Session in Emslie & Simpson Ltd v Aberdeen City District Council [1994] 1 EGLR 33. That case is not recorded as having been cited in Shun Fung, and certainly is not referred to in the judgments in that case. It was a claim for loss of profits suffered by the tenant of
The point at issue is whether the loss must be shown to have been caused by the dispossession, that is to say by the taking of the premises from the claimant in the exercise of compulsory powers, or whether it is sufficient for the loss to be recoverable that it was caused by the overall effects of the scheme of acquisition.
At p38 he rejected the claim upon a basis that must, I think, be too wide, having regard to the decision in Shun Fung, where, in the passage that I have already cited from p136, specific reference is made to the loss having been caused by “the threat of resumption”. The Lord President said at letter A:
It is dispossession caused by the taking of the lands which gives rise to compensation, not the threat of dispossession or the effects of publication of plans for the execution of the works.
I would not accept this as a correct statement of the law as it now stands. The agreed facts in this case, and the inferences that I have drawn from them, have led me to the conclusion that if the “holding costs”, as now defined, in fact turn out to amount to losses, they were losses caused by the threat of dispossession, and that, as a matter of law, is a sufficient causal connection with the compulsory acquisition to satisfy the first of the conditions for a loss to qualify for compensation.
There remains the question of remoteness. Mr Elvin made no separate submissions as to remoteness. Lord Nicholls at p126D of the Shun Fung judgment referred to the “familiar and perennial difficulty [of] attempting to formulate clear and practical guidance on the criteria by which remoteness is to be judged”. He observed:
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.
It seems to me that it is hard to think of any effect, upon a proposal to market retirement homes for people to live in, of a threat to acquire those homes compulsorily from any purchaser for the purpose of demolishing them that is more obviously foreseeable, likely, probable or natural than that such a proposal for marketing will be frustrated. I therefore conclude that the second condition for the loss claimed in this case to be compensatable is also satisfied.
Having reached the conclusion I have by the reasoning that I have tried to set out, it has not been necessary for me to consider whether the conclusion that the majority in the Court of Session reached in Emslie was wrong as well as the particular reasoning that I have found it necessary to reject. Nor has it been necessary in this case, as the Privy Council has suggested will be necessary upon an appropriate occasion, to reconsider Stephenson LJ’s observation in Prasad in so far as it might apply to loss of profit due to blighting of the area as a whole, such as was being considered in Emslie. The effect of the scheme in such sense falls to be disregarded in the assessment of market value as at the date of entry. Whether losses suffered by those whose property is eventually acquired, during the period when the scheme is being brought to fruition, as a part of the overall effect of the scheme upon the area generally, as opposed to the particular effect of the threat of acquisition of the premises themselves upon that property, is compensatable is a matter upon which I would not wish to be taken as having expressed an opinion without argument in circumstances where that question arises for decision.
Costs
The formulation as to the computation of the claimant’s holding costs that has been agreed leaves open the possibility that the claimant may have suffered no loss. It is by no means impossible that, when the state of the market is investigated, it will turn out that the claimant will have been better off being unable to sell in the market conditions of 1993 and receiving rent to off-set the interest on the price at which the property would have been sold until the compulsory acquisition in 1997. I say this because the way in which the claim was originally presented appeared to indicate that a sale when the property was first marketed would have involved the claimant in accepting a loss on its investment in the land and development.
For this reason, having heard counsel on the appropriate order as to costs on a hypothetical basis, I will order that the authority should pay the claimant’s costs of this preliminary issue if the claimant succeeds in establishing its claim for holding costs as now formulated. Otherwise, there should be no order as to costs.
Appendix 1
Matters agreed
9.1 The nature of Ryde’s business is that of a property developer developing properties for onwards sale.
9.2 The problems encountered by Ryde in selling the individual units upon completion of the development were occasioned by the state of the market in 1989 and 1990 onwards.
9.3 Ryde decided in 1990 to let the individual units on a short-term basis although planning permission had been refused for general housing (see 4.3 and 4.4 above). No enforcement action had been taken by the planning authorities.
9.4 Had it not been for the Tramlink scheme and the CPO, eventually Ryde would have been able to sell the individual units or the development as a whole.
9.5 But for the scheme the property would have been sold on 25 March 1993 and therefore the calculation of the holding costs should start from 25 March 1993.
9.6 The development would have been sold on 25 March 1993 with vacant possession but only if Ryde had first taken steps to terminate the existing tenancies and obtain vacant possession before sale.
9.7 Knowledge of the proposals for Tramlink was in the public domain as at May 1991.
9.8 Croydon Council’s decision to promote the tram bill was made on 4 November 1991. Ryde petitioned the House of Lords in opposition on 4 February 1992 and the House of Commons in April 1993. On 23 April 1994 Ryde withdrew its petition and LRT gave a parliamentary undertaking to Ryde.
Appendix 2
Agreed approach to valuation
1. Find the value at which the subject property would have sold in the open market with vacant possession on 25 March 1993, disregarding the effects of the Tramlink Scheme (deducting the costs if any of obtaining vacant possession).
2. Add interest to that 1993 value for the period between 25 March 1993 and 8 August 1997 at the rate at which money was, in fact, being borrowed by the claimant during the said period.
3. Subtract the rent received from letting the subject property as fully as could have reasonably been achieved during the said period net of the claimant’s estate management costs for the said period (ie the costs of letting, managing and maintaining the subject property during the said period).
4. The product of steps 1 to 3 above is to be set off against the open market value of the subject property as at 8 August 1997 (ie the value of the subject property for the purpose of r 2 of the land compensation rules).
5. To the extent that the set off described in 4 above produces a positive figures, that figure shall represent the amount of the holding costs payable to the claimant by the acquiring authority in accordance with r 6 of the land compensation rules. That figure (together with any other disturbance compensation properly payable to the claimant) shall then be added to the value of the subject property as assessed in accordance with r 2 of the land compensation rules, in order to arrive at the overall amount of compensation payable by the acquiring authority to the claimant for the compulsory purchase of the subject property. An appropriate adjustment will then have to be made for the advance payment made by the acquiring authority.
