Disturbance claims: the legal principles

This is the first in a series of articles about the assessment of claims for disturbance following compulsory purchase of land. Loosely based on a webinar I and others at FTB delivered on 9 June 2020. Next in the series: disturbance claims by landlords and developers.

A claim for compensation on account of disturbance can be substantial, particularly where they relate to business premises. They can take in lost profits, moving expenses and even, in an extreme case, the entire value of the business run from the premises. They are also notoriously difficult to construct and to value. This article looks at some of the underlying legal principles, to assist practitioners faced with making or defending such a claim.

Disturbance claims: some history

The history of disturbance claims (that is, claims for losses arising from being 'disturbed' from possession of land) reflects the convoluted development of compensation law generally. In the 19th century, the courts recognised that compensation should reflect not just the market value of land taken, but the value of that land to the owner. Thus an owner should be entitled to claim, as part of the value of that land to him, any losses incurred as a result of being forced to leave the land.

That entitlement to compensation was then effectively preserved in the six rules, familiar to compensation practitioners, which were first enacted in 1919. Thus rule 6 of those rules, currently found in s5 of the Land Compensation Act 1961, is on the face of it curiously worded as it does not create or refer to any entitlement to compensation but merely provides that rule 2 (as to the open market value of land) "shall not affect the assessment of compensation for disturbance or any other matter not directly based upon the value of the land".

Two species of disturbance claims

The traditional disturbance claim, described above and referred to in rule 6, must by definition relate to an estate or interest in land, because it reflects part of the value of that land to the owner.

This, of course, leaves a gap. Any lawful occupier with no estate or interest in the land cannot be compensated under this route for losses arising out of being forced to leave the land because of the CPO. Specific statutory provision is made in s37 of the Land Compensation Act 1973 to plug this gap; claims under this section and r6 are mutually exclusive, so it is important to decide which one applies.

LCA 1973, s37: occupiers without an interest

The specific statutory entitlement for occupiers without an interest in the land is to a 'disturbance payment', which is comprised of (1) removal expenses (2) trade/business losses consequent on quitting the land and (3) interest from the date of displacement. The only requirement set out in the statute is that the occupier must have been in lawful possession at the relevant date (set out in s37(3)); essentially this is the date when first notice of the order was given, or when the land was acquired by agreement. Thus an occupier coming to the land after the CPO is in train will have no entitlement.

Clearly, an occupier must also prove loss in order to make a claim. In that respect, the general principles developed in the context of rule 6 disturbance claims will apply (as to which, see below). The statute does provide that regard must be had to the reasonably expected availability of the land acquired for continued occupation, and the availability of other reasonably suitable land. An occupier who would have had to leave the land anyway, or who can easily move to a similar site next door, will accordingly not expect much in the way of compensation. But that would probably be the result under the general law anyway, as we will see.

Rule 6 claims: occupiers with an interest

In order to make a disturbance claim under rule 6 a claimant must be (1) an occupier of land acquired (2) with an estate or interest in the land (3) who has lost possession of the land and (4) who is not claiming for the land value on an inconsistent basis. These requirements are largely self-explanatory.

The fourth again relates to the fact that disturbance compensation is seen as an aspect of the land value, albeit one that is properly assessed separately from the open market value of the land. Thus a claimant who is seeking compensation for the market value of the land on the basis of its development potential cannot also make a claim for disturbance losses which assumes he would have continued his existing business. The two claims are inconsistent, because the market value claim implies that the claimant's business from the land would have ceased in any event (these were the facts of the seminal rule 6 case of Horn v Sunderland [1941] 2 KB 26).

Assessment of disturbance claims

Where a disturbance claim is available in principle, a claim to recover any loss must be scrutinised against three legal tests: (1) causal connection (2) remoteness (3) reasonable mitigation (see Director of Buildings v Shun Fung [1995] 2 AC 111 at p126).

For a causal connection to exist between the acquisition and the loss, the loss will normally arise after the acquisition. But not always. The decision in Shun Fung recognised the existence of a 'shadow period' before the disturbance and even before the CPO is made during which losses will be compensatable.

Two notes of caution are appropriate here. First, care must be taken in incurring expense before the CPO is made; if it is not made then there will be no entitlement to compensation at all. Second, the 'shadow' is that of the acquisition only; the general blighting effect of the scheme is not compensatable here. It may of course be very difficult to differentiate between the two in practice, which adds a further level of difficulty to such claims.

The test of 'remoteness' is notoriously easy to state and difficult to apply. As it was put in Shun Fung, only losses which are "reasonably foreseeable, not unlikely, probable, natural" as a consequence of the CPO will be recoverable. An AA may well say, therefore, that a particular loss is unexpected and unforeseen, and should not be included in the claim. A Claimant therefore needs to show, in a sense, that the failure to foresee the loss is culpable and that a reasonable AA could have seen it coming. Incidentally, this is one further reason for an AA to ensure it is well informed about the land it is to acquire and the businesses being run from that land. A Claimant can otherwise turn the AA's failure to make inquiries against it in any disturbance claim.

Finally, a Claimant must take reasonable steps to mitigate its loss. Although this responsibility is on the Claimant, the onus is actually on the AA to show a failure to mitigate if it wishes to rely on this point, and it must give the Claimant sufficient notice of the point to allow it to be met. The requirement is simply for 'reasonable' behaviour, although as in other areas of the law the effect of this requirement being applied with hindsight inevitably puts Claimants in a difficult position (not least because, as referred to above, taking any step of mitigation before the order is made is risky, as the loss/expense may not be recovered). A Claimant must show reasonable flexibility, for example taking leasehold rather than freehold premises if they are better situated for its business.

The two bases: relocation and extinguishment

A disturbance claim falls to be assessed on one of two bases: either the losses arising from relocation of the business, or, in an extreme case, for shutting down the business altogether. The latter clearly represents an extreme scenario. The extinguishment value of a business should normally set a ceiling on any relocation claim - as it does not, in general, make economic sense to spend more on moving a business than the business itself is worth (sentimental value is not relevant here). However, there may be occasions (for example, with a new business on which much initial outlay has taken place) when a "reasonable businessman, spending his own money" (Shun Fung) would decide to pay more to move the business than it is worth overall. These cases will clearly be rare and fact specific.

Relocation

The following heads of claim typically form part of any claim assessed on the relocation basis:

(1) Extra costs of new premises ONLY IF there is no alternative and no benefit: the Claimant will have been compensated separately for the value of his estate/interest, which in theory should enable him to buy equivalent premises elsewhere. If more is spent on the new premises - either in capital or running costs - the presumption is that the Claimant is getting 'value for money' on that expenditure and so should not be compensated for it. However, this presumption can be rebutted where it is shown that the Claimant had no alternative and will derive no benefit from the extra expense. In that case he is getting no value for money, just incurring a loss as a result of the CPO.

(2) Adaption of new premises to make equivalent with old: but not, clearly, improvements or other alterations (see above).

(3) Removal expenses and costs: including the cost of informing clients of the move, providing new stationery with the new address on it.

(4) Permanent loss of capital value of the business (confusingly called 'goodwill')

(5) Temporary loss of profits arising from the move: this is a distinct head of claim to the previous one, and care must be taken to ensure that they do not overlap.

(6) Staff time ONLY IF a proxy for lost revenue: Normally the diversion of staff time would be reflected in the loss of profits associated with the move and is therefore not recoverable. However, it may be used as a proxy for lost revenue if it can be shown (i) that a certain amount of time has been spent on the move and (ii) the diversion of this time has caused serious disruption to the business. Claimants may prefer this route as it may be easier to quantify than a free-floating 'loss of profits' claim; profits may fluctuate based on a multitude of factors which it can be difficult to allow for when formulating any claim. Claims for personal time, which are always a hot topic for clients, are the subject of a separate article in this series.

Extinguishment

The sums involved in an extinguishment claim can be very large, because the whole value of the business is at stake. There will be only one head of claim, and the difficulty is one of quantifying it. How to decide how much the business is worth? This is a question on which legions of businesspeople, investors and corporate finance academics will have strong views as to the correct approach. Traditionally, the tribunal has used one of three methods:

(1) Annual profits x multiplier. Annual profits are susceptible to objective verification from the accounts, although obvious issues will arise if either side asserts they would have gone up or down compared to historic levels. The selection of an appropriate multiplier is more difficult, and relies on identifying comparable transactions in the market. These will likely be few, and there may be issues around the availability of information, the timing of such transactions and the 'cleanness' of them (e.g. where business sales include the sale of other assets). A large measure of valuation judgement is likely to be required.

(2) Discounted cash flow. This method offers apparently greater sophistication, but that may simply generate greater complexity and a spurious accuracy which conceals the many valuation judgements that have been made to generate the inputs to the process. It will rarely be appropriate to explore save in very high value claims.

(3) The 'robust' approach. This approach, essentially a spot valuation, is at the other end of the spectrum to DCF valuations as far as sophistication is concerned. The Tribunal is an expert forum capable of forming its own valuation judgements, so a valuation by the Tribunal on this basis will likely not be susceptible to challenge on appeal. For the parties, however, it is almost always more attractive to present a case with at least some semblance of quantification to it.

'Other matters not directly based on the value of the land'

Finally, 'other' claims under rule 6 should not be forgotten. This is the route by which legal and professional fees arising before any reference is made to the Tribunal are recoverable as a loss arising out of the acquisition. Such fees are (unlike those incurred once Tribunal proceedings start) recoverable by right as long as they are reasonable; the Tribunal on the other hand always has a discretion when it comes to costs. It is therefore in a Claimant's interest to ensure that its claim is fully researched and formulated at the pre-action stage.

Cain Ormondroyd is a barrister at Francis Taylor Building specialising in all aspects of land valuation and planning law.