New compulsory purchase legislation risks treating business tenants differently depending on when orders were made. Abigail Walters addresses the unfairness
For a business owner, being faced with the compulsory acquisition of your property can mean a great deal of upheaval, stress and expense. Business tenants want to know that they are going to be fairly compensated for the compulsory acquisition, as well as any related costs and losses, in the same way that other businesses would be.
The government has recently legislated on the basis of compensation for business tenancies in the Neighbourhood Planning Act 2017. Legislative change was considered necessary as case law on compensation for business tenants was causing considerable unfairness. Despite the acknowledgement that an update to the law in this area was necessary, the measures only apply to land acquired through orders confirmed after 22 September 2017, leaving concerns about the creation of a two-tier compensation system and questions about whether the measures have gone far enough.
Making way for infrastructure
It is unlikely to have escaped anyone’s notice that numerous infrastructure projects are authorised or proposed across the UK. The construction of the first phase of the High Speed 2 railway (HS2) is on the horizon and pre-application consultation on the expansion of Heathrow Airport is anticipated in early 2018. These examples, along with many others, make up a major projects portfolio worth over £455bn, according to figures from the Infrastructure and Projects Authority.
All of this infrastructure development requires land and, in many cases, it is necessary for this to be acquired by compulsory acquisition.
The process
There are a number of different ways in which compulsory acquisition can be authorised, including compulsory purchase orders (CPOs), development consent orders (DCOs) and hybrid bills such as HS2. While it is possible for affected land owners to object to all of the above processes, it can be difficult to maintain a successful objection in circumstances where a site sits squarely in the way of proposed major infrastructure.
Once compulsory acquisition powers have been confirmed by the secretary of state or parliament, the second stage of the process can take effect, ie the actual land take. Notices can be served requiring possession of the land on as little as three months’ notice.
This can often cause difficulties for businesses, particularly as tenants often have to make their own arrangements for relocation upfront, at their own cost and without any certainty as to the level of compensation that they will ultimately recover. Business tenants would receive compensation for the value of the leasehold interest acquired at market value (referred to as rule 2 compensation) as well as for disturbance (referred to as rule 6 compensation) and loss payments. Disturbance compensation is usually based on either the costs of relocation of the business or incurred through forced closure.
This is made even worse for some business tenants, due to a piece of case law commonly referred to as the “Bishopsgate principle”. In Bishopsgate Space Management Ltd v London Underground Ltd [2004] 2 EGLR 175 it was determined that, when calculating compensation due to business tenants, it should be assumed that the landlord would terminate the leases at the first available opportunity. This was irrespective of whether the termination of the lease would have happened in the reality of the situation. For instance, a tenant in occupation under a 20-year lease, but with a break clause capable of operation on six months’ notice, would be compensated on the basis that they only had a six-month tenancy. The fact that the landlord would not have been likely to terminate the tenancy in reality is not taken into account.
This significantly reduces the amount of compensation paid both for the land taken and for business disturbance, and therefore often causes long delays in agreeing compensation. It is particularly unfair when contrasted with the position of occupiers, who have a lesser interest in land, yet whose compensation can take into account the period “for which the land may be available for the purposes of their business”.
The effect of the 2017 Act
Due in significant part to the lobbying efforts of the Compulsory Purchase Association, the Neighbourhood Planning Act 2017 was introduced in part to combat perceived shortcomings and unfairness in the system. Section 35 of the Act specifically targets the Bishopsgate principle, dictating that the likelihood of the continuation or renewal of the tenancy must be taken into account when determining compensation. Similarly, the total period for which the tenancy may reasonably have been expected to continue, including after any renewal, must also be considered. This effectively overrides the Bishopsgate principle.
However, while this has addressed the situation of those whose land is acquired under orders confirmed after 22 September 2017, it has also unfortunately given rise to an unfair, two-tier system. This is due to the lack of retrospective impact, the biggest failure of the transitional provisions. For all compulsory acquisition powers already confirmed by 22 September 2017, compensation claims will still be subject to the Bishopsgate principle, significantly reducing the levels of compensation.
In respect of many schemes confirmed in the last three to five years, land acquisition powers are live, but may not have yet been exercised. This means that two business tenants in similar circumstances can be served with notices taking their land on the same date and yet be compensated on entirely different bases. Given that claims can be brought for six years following an acquisition, this means that the two-tier system of compensation could be around for a further 11 years.
Considering that the government deemed it necessary to legislate for change in this respect, it seems particularly unjust that the Bishopsgate principle is still being allowed to create lingering unfairness. The difficulties with the retrospective application of legislation are noted, not least for the accuracy of property cost estimates for government-funded infrastructure proposals.
However, case law can be overturned at any point retrospectively by parties with deep enough pockets to see the challenge through the courts. More should have been done to ameliorate the unfairness on small-to-medium enterprises and British businesses generally, which the government should be supporting.
The fact that the government has put compulsory purchase reform on the agenda is positive but it needs to be done in a way that avoids creating further inequalities. Given the current flaws in the system, understanding factors affecting compensation entitlement at an early stage is key for affected parties.
What to do when facing compulsory acquisition
The most important thing is that those affected by compulsory acquisition should take early advice from a specialist CPO solicitor, who will act in conjunction with a surveyor.
Generally, how land is held can seriously affect property valuation in compulsory acquisition scenarios. Affected landowners should take early advice on these issues to understand the compensation impacts of how their land is held. Where land is safeguarded for major infrastructure, early negotiations are likely to minimise or mitigate against the impact of compulsory acquisition on retained land holdings.
For business tenants, it is important to understand whether the tenancy is protected by the Landlord and Tenant Act 1954 (the 1954 Act) and whether it was correctly contracted out, as statutory provisions assist tenancies protected by the 1954 Act.
The existence and nature of break clauses should similarly be considered as, where break clauses are conditional, acquiring authorities may accept that the Bishopsgate principle should not apply.
Where there are still concerns that the principle will apply, it may be possible to put in place new leases or look at whether a different form of occupation provides a better compensation position. This is more likely to be possible in cases where the landlord is supportive or related to the business tenant in some respect.
However, the timing and purpose of any such changes should be carefully considered and it is important not to fall foul of provisions designed to prevent deliberate attempts to increase compensation entitlement.
Abigail Walters is a partner in the planning team at Shakespeare Martineau
