Land value capture and compulsory purchase legislation

The Government is looking at whether more land value could and should be captured from development schemes, and if so, how.

One proposal under consideration is to enable Local Authorities to use compulsory purchase powers to acquire land at existing use value, ignoring any hope value. Gateley Hamer’s Managing Director, Jonathan Stott, sets out how the existing compulsory purchase framework works and why the proposed changes would not only be unfair, but would also fail in achieving the Government’s aim.

The Communities and Local Government Committee is looking at the effectiveness of current land value capture methods. The Committee is primarily focusing on the need for new ways of capturing any uplift in the value of land associated with the granting of planning permission or nearby infrastructure improvements.

Through evidence submitted to the Committee and as a result of various papers produced by organisations including Shelter, the Centre for Progressive Capitalism and Civitas, focus has shone on proposals to amend aspects of the Land Compensation Act 1961 to fundamentally alter the means by which compensation is assessed to reflect the value of land acquired through compulsory purchase. Those proposals have gained significant media coverage (FT – 6th June 2018; Planning – 17th May 2018).

Section 5 of the 1961 Act includes 6 rules which act as the cornerstone of the Compensation Code that applies when compulsory purchase powers are used. The overarching principle of the Compensation Code is of financial equivalence, whereby a dispossessed owner should be no worse off nor any better off in financial terms as a result of the compulsory acquisition.

Rule 2 of Section 5 of the 1961 Act sets out how compensation is to be assessed for the value of land acquired through compulsory purchase, as follows:

‘The value of land shall, subject as hereinafter provided, be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise’.

Other provisions of the Code require that where compulsory purchase powers are used, any effect on land value attributable to the underlying scheme is to be disregarded. As such, the value to be paid reflects what the land might have been sold for in the ‘no scheme world’.

In the vast majority of cases, the market value payable is reflective of the ‘existing use’ value of the land, but in a small number of cases (I would estimate less than 10%) it reflects an element of ‘hope value’ (i.e. reflecting the possibility that the land might be suitable for some other development in the future), and in extremely rare cases it might reflect full development value, or something approaching that. However, hope value or development value is only paid if it can be demonstrated to exist in the no scheme world.

The Centre for Progressive Capitalism has proposed that the provisions of the 1961 Act be changed so that ‘no account is taken of any prospective planning permission’ (from CfPC written evidence to the CLG Committee).

Civitas explain, in a report titled ‘Building Homes Faster?’ published last year, that amending the 1961 Act would ‘enable local authorities to purchase land at below its residential use value’.

Shelter’s written evidence to the CLG Committee suggests that the current provisions have ‘a distorting effect on the price of land in general – not just land that is subject to CPO’. They state that ‘Prior to the introduction of the Act, land could be purchased at values which reflected its existing use’ and that ‘Providing new, clear and certain guidance over the valuation of land coming into development through CPO would incentivise landowners to enter negotiations over putting their land into development instead of holding out for CPO’.

To anybody who works in the field of compulsory purchase, I expect the inference by Civitas that local authorities regularly pay compensation based on residential use values is baffling, and the idea that landowners are ‘holding out for CPO [compensation]’, as suggested by Shelter, is completely alien.

As the Compulsory Purchase Association’s written evidence to the CLG Committee explains, it would appear that the proposals are based on ‘a fundamental misunderstanding about how the existing statutory provisions provide for compensation to be assessed in practice’.

The CPA’s response goes on to explain that ‘The current statutory compensation framework ensures that i) compensation is very rarely paid to reflect the value of land with planning consent where that consent does not actually exist, and ii) value which is attributable to the acquiring authority’s scheme and/or associated transport infrastructure is excluded from compensation’.

Of course, in any event the provisions of the 1961 Act only apply in cases where compulsory purchase powers are being used (which I would estimate relates to around 5-10% of the new homes being delivered each year). As such, changing the provisions of the 1961 Act such that any hope value is ignored when compulsory purchase powers are used would lead to a two-tier market. This is something that Richard Harwood QC picks up in his paper, following on from the Law Reform Lecture that he presented for the CPA recently.

Richard explains that if the proposals were acted upon, ‘a two price system would develop again, with private market transactions reflecting the potential for development whilst deals under the threat of compulsory purchase were depressed’ (para 7.2).

He also states, contrary to the suggestion made by Shelter, ‘The compensation code has no effect on land sales in non-compulsory purchase situations, where the vast majority of development land is assembled. Where compulsory purchase is used or seriously threatened, development potential usually has no effect or only a very limited impact on the compensation paid’ (para 7.11).

Whilst I don’t oppose the principle of land value capture generally, if new ways of doing it are to be introduced, I cannot see how reforming the 1961 Act would possibly be an effective means.

If the Act were to be reformed to the effect that existing use value had to be paid in all cases, even where hope or development value could be shown to have existed in the no scheme world, I believe this would result in CPOs being subject to much greater numbers of objections, and far more human rights challenges.

This would very likely increase the cost for local authorities promoting compulsory purchase powers, extend the length of public inquiries, and more than likely result in Local Authorities being less inclined to promote CPOs in the first place. In that event, an even greater proportion of new residential development sites would have to come forward in a manner that would see developers paying more for land and even less value being captured – completely at odds with what the CLG Committee is seeking to achieve.