Lost profit claims by landlords and developers
In addition to the market value of land, clients who operate businesses from land are generally entitled to compensation for disturbance of that business, including profits lost as a result of the compulsory acquisition (on which, see my earlier article in this series).
Clients who are in business as professional landlords or property developers may find that their business is subject to considerable disruption as a result of the acquisition, and expect full compensation. However, this is one of those areas where the perception of the owner as to what is fair and the perception of the law, as set out in decisions of the courts, do not match up. This article looks at the parameters for recovery of those losses.
Lost rent
A landlord who is letting out property which is then compulsorily acquired will have lost rental payments as a result of the acquisition. The key distinction here is between rental losses before and after the valuation date.
Rental losses sustained before the valuation date are recoverable in principle, subject to the principles of causation, remoteness and reasonableness/mitigation. They qualify as an “other matter not directly based on the value of land” under rule (6). Although rent might be thought on one view to be a matter ‘directly based on the value of land’ (i.e. its rental value), the tribunal has made clear that the ‘value of land’ being referred to is the value ascertained under rule 2 (i.e. its capital value): Pattle v SST [2009] UKUT 141 (LC) at [41].
In this respect past rental losses are similar to holding costs incurred by a landlord/developer who has had to retain property which would otherwise have been disposed of before the valuation date. These too are recoverable in principle: Ryde International v LRT [2001] RVR 59. A particular head of holding costs that should not be forgotten are liabilities for empty rates which may well accompany rental losses: see Castle House Investments v Bradford MBC [2007], where rental losses and empty rates were claimed successfully (although without argument on the principle).
Note that rental losses must be due to the prospective acquisition of land, not purely a result of the general blighting effect of the scheme, which may well lower rental levels in certain areas. Such losses are said not to be fairly attributable to the taking of the land; they are instead considered to be attributable to the overall blighting effect of the scheme: Ramac v Kent County Council [2014] UKUT 0109 (LC) at [135]-[137], and cf Pattle at [53]. The combination of this requirement with the three tests of causation, remoteness and reasonableness/mitigation tends to make such claims fairly difficult to advance successfully.
Rental losses after the valuation date, on the other hand, are not directly compensatable. They are reflected in the open market value of the land ascertained under rule 2. This figure amounts to a capitalisation of future rental flows, such that future rental losses are not separately recoverable: Mallick v Liverpool CC (1999).
Redevelopment proposals
The relevance of redevelopment proposals to the rule 2 valuation is discussed below. They may also be relevant to claims for lost rent prior to the valuation date as a result of the tribunal’s decision in Pattle. After starting from the proposition that lost rent prior to the valuation date could in theory be recovered, the tribunal saw no distinction in principle between lost rent on a site in its existing condition and lost rent on a redeveloped site: [46]-[47].
It is arguable that Pattle was wrongly decided. There is a degree of inconsistency in assessing rule 6 compensation on the basis that the land has been redeveloped, when the rule 2 compensation is to be assessed on the basis of the land in its actual condition. The Tribunal explained this inconsistency away by stating that the rule 6 claim did not assume that the land was in a different condition; it merely reflected the “obvious opportunity for the Claimants to make profits” by pursuing a redevelopment of the land in its existing state: [47]. There remains a sense in which the reasoning of Pattle requires a counter-factual scenario of the sort deprecated by the House of Lords in Spirerose v TfL [2009] UKHL 55. As matters stand, however, Pattle can be relied on to claim lost rents consequent on a redevelopment scheme.
The current problems for claimants are not theoretical, therefore, but practical. The tribunal itself noted the difficulty for a claimant of satisfying the requirements of causation, remoteness and reasonableness in respect of such losses. Furthermore, the costs of pursuing the redevelopment proposal would need to be set off against any increased rents that might have been generated as a result of it. So the amount ultimately to be gained may rarely be worth the necessary expense to make good the claim.
These difficulties may be reflected in the fact that there is no reported case I am aware of in which a Pattle type claim has succeeded. The claimant in Acrofame v LDA [2012] UKUT 107 (LC) declined to advance its claim for lost profits consequent on the construction of a hotel in a way consistent with Pattle. However the Tribunal observed that on the facts it had not shown that a hotel would in fact have been developed in the no scheme world; this despite the fact that there was an implemented planning permission for a hotel and that the claimant’s owner was a builder. Similar problems will confront other claimants who cannot show a track record of delivering similar developments to that the subject of the claim.
Development profit vs development value
A site which has potential for development will sell in the open market for more than a site without that potential. The uplift over existing use value that is delivered by the prospect of development is sometimes referred to as development value or, if it is more tenuous, hope value (development value is a confusing term in that respect because it can also refer to the value of the completed development).
It is well established that the valuation of land under rule 2 should include any uplift for development potential at the valuation date. This is fundamentally because in an open market sale, developers would be among the class of potential purchasers. Their demand is thus capable of driving value in the valuation exercise – the valuation reflects a hypothetical sale but the market in which it takes place is real: Gray v IRC [1994] STC 360 per Hoffmann LJ.
There will of course be evidential issues in establishing how secure the prospect of development is. The greater the certainty, the more the effect on value is likely to be: Spirerose v TfL [2009] UKHL 55. As far as planning permission is concerned, any uncertainty can be ironed out by the application of s14 of the Land Compensation Act 1961, which converts the probability that planning permission would have been granted into the assumption that it had been granted; this issue can be bottomed out before the making of a reference by the ‘certificate of appropriate alternative development' procedure under s17. Other uncertainties (e.g. as to access, land assembly, or the availability of other consents) may remain.
Development value can be difficult to establish clearly and also presents difficulties of valuation; sales of similar sites for development may be few and far between and the Tribunal has repeatedly discouraged the use of residual valuations: see Ridgeland Properties Ltd v Bristol CC [2009] UKUT 102 (LC) at [293] for a recent example. It is a valuation method “of last resort which is inherently very sensitive to even small changes in input variables”. Nevertheless, the principle that value reflecting development potential can be claimed is well established (for the moment!).
This is all very well for a claimant who is an owner-occupier or landlord. However, a claimant who is a developer may well say: ‘I do not buy sites just so that I can sell them on at the same price. I acquired this site hoping to earn a profit by developing it and I am deprived of the ability to do that by the compulsory acquisition. Therefore I ought to be compensated for the profit I would have made’. Unfortunately, as opposed to hope or development value, a loss of ‘development profit’ is not compensatable.
This was established clearly in Ryde International plc v London Regional Transport [2004] EWCA Civ 232, by Carnwath LJ (as he then was): “It is true that the acquisition deprived Ryde of their expected profit, but it also relieved them of the corresponding risk. Therefore, there was no reason for the loss of profit to be the subject of separate compensation, and no departure from the principle of equivalence. At the date of entry, Ryde's interest in the land, as a source of expected future profit, was replaced by a different asset, in the form of a statutory debt. The delay between the acquisition of that new asset and its realisation was compensated by the right to statutory interest at the prescribed rate.” In other words, the money received in compensation could be invested in a different project elsewhere to generate a profit (as the Lands Tribunal had said [17]), thus putting the landowner in the same position as if the acquisition had not occurred. The court was therefore of the opinion that there was no further loss beyond the value of the land to be compensated, but even if there were it would be excluded from r6 because ‘directly based on the value of the land’ [25].
This reasoning is convincing on the face of it, but ultimately may seem unconvincing to a developer client. If the land was ‘ready to go’ as a development opportunity, it is likely to have had a far greater profit-earning potential for a developer than the compensation received. It is unlikely that a new site could be acquired and readied for development instantaneously, if at all. It is therefore hard to escape the impression that the principle of equivalence has not been satisfied; the developer has not received the full value of the site to him. Be that as it may, the approach in Ryde is now well established and it is something clients will have to live with, unless they want to take advantage of Lord Carnwath's recent retirement from the Supreme Court to seek to have it overturned. This is all the more reason for claimants to ensure that the maximum possible allowance is made for development value in the rule 2 valuation.
Cain Ormondroyd is a barrister at Francis Taylor Building specialising in all aspects of planning and land valuation.