Compulsory purchase reform in Scotland: consultation

8. Compensation

Overview

8.1 The rules governing compulsory purchase compensation in Scotland are founded on the underlying principle of ‘equivalence’. This is the long-standing principle that those whose land is acquired by compulsion should be put (at least in financial terms) in the same position after the acquisition as they were before it, being left neither better off nor worse off as a result.

8.2 People who are subject to compulsory acquisition and are entitled to claim compensation are referred to as ‘claimants’. Claimants are entitled to four principal elements of compensation, which are sometimes referred to as ‘heads of claim’ or ‘heads of compensation’:

• the value of the land to be acquired
• injurious affection payments for the reduction in value of other land retained by the claimant
• disturbance payments for losses which are unconnected to the value of the land, such as removal costs and professional fees
• loss payments recognising the inconvenience and disruption caused by compulsory purchase

8.3 The legal basis for these heads of compensation is derived from a combination of statute and case law. As regards the first two heads, section 48 of the 1845 Act refers to “the value of lands to be purchased” and “compensation claimed for injury done or to be done to the lands held therewith”. The 1963 Act sets out rules specifying how compensation for the value of the land acquired is to be assessed. Loss payments were introduced separately in the 1973 Act.

8.4 Over time, case law has determined that, in order to uphold the principle of equivalence, claimants should be compensated for additional costs such as removal and re-establishing a business in another location. Such costs, which can effectively be thought of as expenses, are referred to in a compulsory purchase context as ‘disturbance’. However, there is no statutory definition of disturbance in the current legislation and the right to compensation for disturbance is not clearly set out.

8.5 The remainder of this chapter of the consultation paper is structured around the four key heads of claim.

Value of land acquired

General rules

8.6 Claimants’ entitlement to compensation for the value of the land that is acquired compulsorily is very long-standing, dating back to the 1845 Act. Section 12 of the 1963 Act contains six rules for assessing how such compensation is to be assessed, first formulated in 1919. These are:

(1) No allowance shall be made on account of the acquisition being compulsory.

(2) 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.

(3) The special suitability or adaptability of the land for any purpose shall not be taken into account if that purpose is a purpose to which it could be applied only in pursuance of statutory powers, or for which there is no market apart from the special needs of a particular purchaser or the requirements of any authority possessing compulsory purchase powers.

(4) Where the value of the land is increased by reason of the use thereof or of any premises thereon in a manner which could be restrained by any court, or is contrary to law, or is detrimental to the health of the occupants of the premises or to the public health, the amount of that increase shall not be taken into account.

(5) Where land is, and but for the compulsory acquisition would continue to be, devoted to a purpose of such a nature that there is no general demand or market for land for that purpose, the compensation may, if the official arbiter is satisfied that reinstatement in some other place is bona fide intended, be assessed on the basis of the reasonable cost of equivalent reinstatement.

(6) The provisions of Rule (2) shall not affect the assessment of compensation for disturbance or any other matter not directly based on the value of land.

8.7 Rule (1) has arguably been superseded by the existence of statutory loss payments, which provide additional compensation to reflect the disruption caused to people affected by compulsory purchase. Rule (6) causes a number of issues for the assessment of disturbance. These issues are explored in the relevant sections below.

8.8 Our current view is that Rules (2) to (5) should be retained in any new compulsory purchase legislation, although they may need to be revised and clarified alongside wider reforms taken forward.

Market value: the current approach

8.9 Rule (2) makes clear that claimants are entitled to the market value of the land that is acquired. However, by definition, compulsory purchase does not involve a willing seller and is not a market transaction. In the context of compulsory acquisition, ‘normal’ market conditions and considerations clearly do not apply. Accordingly, legislation (and case law) prescribe how land is to be valued for the purposes of compensation. In particular, the law specifies those factors which can be taken into account and those that are to be disregarded when compensation is assessed.

8.10 In doing so, legislation and case law in effect seek to ensure that compensation reflects what the market value of the land would have been had it not been subject to compulsory purchase. References to ‘market value’ throughout this chapter should be read in this context. The Courts have observed that this can take CPO compensation into “the realm of the counterfactual”^[25]. There are three key aspects to this:

• the No-Scheme Principle
• the Planning Assumptions
• Certificates of Appropriate Alternative Development (CAAD)

8.11 An important exception to the market value approach to valuation is where the land in question is used for a purpose which has no general demand or market (e.g. a place of worship) and the owner intends to continue the use elsewhere. In such cases, compensation may be on the basis of the reasonable cost of ‘equivalent reinstatement’ (Rule 5).

No-Scheme Principle

8.12 In practice, the value of land subject to compulsory acquisition would likely be skewed by it being included, or potentially included, in a CPO. The value may be reduced or inflated, depending on the scheme. Basing compensation on such values would clearly run counter to the principle of equivalence. Hence, the market value of land acquired in a CPO context is assessed in accordance with the ‘no-scheme principle’.

8.13 In relation to compulsory purchase, “the scheme” is the development underlying the acquisition, such as a road project, housing refurbishment works etc. In summary, the no-scheme principle requires increases or decreases in value which are attributable to the scheme – or the prospect of that scheme – to be disregarded for the purposes of assessing market value. This is partly given effect by the 1963 Act (see section 13 and Schedule 1), which specifies certain developments that are to be disregarded. However, much of what constitutes the no-scheme principle – and the assumptions that are to be made when applying it – are derived from case law which dates back over 100 years.

The Planning Assumptions

8.14 The market value of land depends on various factors. What land can be used for – now and in the future – is an important determinant of market value. As such, the planning system has an important bearing on the value of land. The value of a piece of land sold on the open market will be affected by (amongst other things) its planning status and its development potential. In particular, market value will be influenced by:

• any existing planning permission(s) for alternative forms of development (development value)
• the future prospect of planning permission being granted for alternative forms of development (hope value)

8.15 The existence of planning permission (or prospect of planning permission) may, depending on the type of development, increase the market value of the relevant land. By the same token, where land does not benefit from planning permission and/or there are limited prospects of it being granted, the market value of land will be the same as, or close to, its existing use value. Of course, factors outwith planning (e.g. taxes and subsidies, physical factors such as contamination) can have a key bearing on land’s market value too.

8.16 In broad terms, the CPO compensation provisions seek to replicate this position, in that they take account of the development potential of the land acquired. However, they do so in the context of the wider no-scheme principle. That is to say, the assessment of compensation considers what (if any) planning permissions would have been – or are likely to have been – granted had it not been for the compulsory purchase. Again, this reflects the overarching principle of equivalence.

8.17 To this end, the 1963 Act contains a series of statutory assumptions as to planning permissions which can be taken into account when ascertaining the value of land subject to compulsory purchase. These are often referred to as ‘the planning assumptions’. The relevant provisions (sections 22 to 24) are complicated, but in very broad terms they provide that currently:

• account is to be taken of any extant planning permission (section 22)
• planning permission is to be assumed (sections 23 and 24) for:
  • the acquiring authority’s proposals
  • development specified in a CAAD
  • development which accords with the relevant development plan and can reasonably have been expected to have been granted were it not for the CPO

8.18 It is important to note that even where there is an extant planning permission – or planning permission can be assumed – for an alternative development, the assessment of compensation will take into account the costs, risks and uncertainties of implementing the development. For example, remediation costs, infrastructure requirements and/or restrictions imposed by planning conditions/obligations.

Certificates of Appropriate Alternative Development (CAAD)

8.19 As noted above, the 1963 Act provides that when compensation is assessed, planning permission is to be assumed for development specified in a CAAD. In summary, CAADs provide a mechanism for establishing what development(s) would have been granted planning permission in the absence of the scheme underlying the CPO. To this end, they can help to assess the market value of land that is subject to compulsory acquisition. The relevant procedures are in Part IV of the 1963 Act.

8.20 An application for a CAAD must be made in writing and contain information regarding the classes of development which the applicant believes, either immediately or at a future time, would be appropriate for the land in question, if it were not for the proposed compulsory acquisition (section 25(3) of the 1963 Act).

8.21 CAAD applications are made to the relevant planning authority; they can be submitted by either the claimant or the acquiring authority. In practice, the planning authority will then have to make a judgement about what developments would be acceptable in the ‘no-scheme world’ (i.e. if the underlying scheme did not exist). The planning authority may issue either a:

• positive certificate – indicating planning permission would have been granted for one or more classes of development specified therein
• negative certificate – indicating that planning permission would not have been granted for any development other than the scheme underlying the CPO

8.22 Both the claimant and acquiring authority can appeal against a CAAD to the Scottish Ministers. In practice such appeals are generally handled by the Planning and Environmental Appeals Division (DPEA). As with the no-scheme principle, there is substantial case law relating to CAADs.

Planning permission for additional development

8.23 Under Part V of the 1963 Act, if planning permission is granted for additional development within a period of 10 years after the compulsory acquisition, further compensation may be payable to a claimant if the effect of that permission is to increase the value of the land above the amount paid to the original owner. This is sometimes referred to as ‘second-bite’ compensation.

Summary of Current Position

8.24 To summarise, the intention behind the legislation is that a claimant will receive compensation that reflects what the land in question would have been worth if sold on the open market had the CPO scheme not existed. This reflects the principle of equivalence: that those whose land is acquired should be put in the same financial position as if it had not been taken.

8.25 The assessment of compensation therefore considers the development potential of the land that is acquired. However, this will only be taken into account where it can demonstrably be shown to exist outwith the scheme: increases in value attributable to the acquiring authority’s scheme are disregarded. If land subject to CPO has limited pre-existing development potential outwith the scheme, then that land’s market value – and hence compensation – may very well be the same as (or close to) its existing use value. In other words, there is no automatic right to development or hope value.

Market value: potential ways forward

Disregarding land’s development potential and planning prospects

8.26 In recent years a number of groups have called for the assessment of compensation to take no account of land’s development potential and/or planning prospects. The suggestion is that excluding consideration of development value and/or hope value would enable public bodies to acquire land more cheaply, which would in turn support the provision of affordable housing and other public policy objectives. However, such approaches could result in those subject to compulsory purchase receiving less for their property than it would be worth if sold voluntarily i.e. compensation would be below market value. This would depart from the principle of equivalence and raises some fundamental questions about fairness.

8.27 During the passage of the Planning (Scotland) Act 2019, amendments were proposed which sought to base CPO compensation on exiting use value rather than market value. In May 2019 the Scottish Land Commission published advice to the Scottish Ministers on Options for Land Value Uplift Capture^[26] which flagged the associated risks and advised that any approach:

“will need to ensure that landowners whose land is acquired through compulsory purchase receive equivalent compensation to landowners who sell their land on the open market. Simply introducing new rules to exclude hope value from compensation arrangements without addressing this issue is likely to be regarded as very unfair and could breach the protections provided by the ECHR”.

8.28 The proposed amendments were not ultimately agreed to by the Scottish Parliament but the above quote highlights some of the relevant considerations. As the Land Commission noted, legislative change that results in claimants being compensated below market value would run counter to the principle of equivalence and risks non-compliance with the ECHR. In particular it could give rise to a ‘two-tier’ land market, in which those selling land privately receive a price which takes account of its development potential, while those selling land as a result of a CPO receive compensation which ignores such development potential.

8.29 Another potential unintended consequence identified by the Land Commission is the possibility of disincentivising landowners and developers from making the investment necessary to bring land forward for development. Additionally, below-market value compensation may drive up opposition to (and slow down delivery of) projects involving compulsory purchase.

8.30 Whether such a change could be justified depends on whether it would demonstrably deliver public benefits that would not otherwise be realised, and whether compensating affected landowners below market value is a necessary and proportionate means of achieving those outcomes. This ultimately comes down to evidence.

8.31 At present – and taking account of the risks set out above – it is not clear that excluding consideration of land’s development potential from the assessment of compensation (which would see some claimants receive less compensation than their property would otherwise be worth) can be justified – at least not on a blanket basis. Further evidence, including evidence gathered through this consultation, will help to further inform this view. We would welcome any evidence relating to the impact of the current compensation rules on the use of compulsory purchase in Scotland, which can be submitted separately to cpo.reform@gov.scot.

8.32 The Scottish Government considers that equivalence remains the right strategic approach to compulsory purchase compensation. As such, we propose that, as a general rule, compensation should continue to reflect the market value of the land (disregarding the effects of the underlying CPO scheme). Nevertheless, in the following paragraphs we consider whether there could be any exceptions to this general position.

Question 65: Do you agree that compulsory purchase compensation in Scotland should continue to be based on the principle of equivalence? If not, please explain your reasons.

Question 66: Should compensation for land acquired compulsorily continue to be based on an assessment of its market value (disregarding increases/decreases attributable to the CPO scheme)? Please note that the following questions consider potential exceptions to this approach.

8.33 In England and Wales, as in Scotland, claimants are generally entitled to the market value of land that is acquired through a CPO. However, through the Levelling-Up and Regeneration Act 2023 (“LURA”), the UK Government made provision for the development prospects of land to be ignored in certain circumstances.

8.34 In summary, the LURA provisions (see section 190) allow acquiring authorities promoting certain types^[27] of CPO to include a direction that, for the purposes of that specific CPO, the assessment of compensation will ignore the prospect of planning permission for alternative development. When considering whether or not to authorise the CPO, it is for the Secretary of State to decide whether the direction is justified in the public interest. In effect, this allows for a case-by-case assessment of whether below-market value compensation is necessary and proportionate in the circumstances.

8.35 We would be interested in respondents’ views on whether there are any circumstances in which below-market value compensation could be justified in Scotland. We would be keen to hear thoughts on whether measures along similar lines to the LURA provisions would be appropriate. That is to say, allow acquiring authorities promoting CPOs to include a direction that – in respect of a specific CPO submitted for confirmation – compensation would take no account of the prospect of permission being granted for alternative development. It would be for the Scottish Ministers to determine whether to approve such directions. For any CPO which did not include a direction, the standard planning assumptions would apply (see paragraphs 8.40 to 8.46).

Question 67: Should acquiring authorities have the power to request that, for a specific CPO, compensation would take no account of the prospect of planning permission being granted for alternative development? It would be for Scottish Ministers to make the decision when confirming the CPO.

In what circumstances do you think this approach would be justified?

No-Scheme Principle

8.36 The Scottish Government’s view is that the no-scheme principle is an important component of the way compulsory purchase compensation is assessed. Disregarding increases and decreases in value that are attributable to the scheme underlying the acquiring authority’s CPO is vital to ensuring fairness to both owners and acquiring authorities, and consistent with the principle of equivalence.

8.37 Applying the no-scheme principle is inherently complex: it involves the valuation of land in a hypothetical world in which the acquiring authority’s proposals do not exist. However, the task is made more difficult by the fact that much of what constitutes the no-scheme principle is derived from case law, some of which is convoluted, and in some instances seems contradictory. What is contained in statute is old and complex.

8.38 The position as it stands in Scotland was summed up by the Scottish Law Commission, whose 2014 Discussion Paper stated:

“Our impression is that a combination of over-complicated statutory provisions and judicial activism have left the whole matter in a state of considerable confusion; so that only a comprehensive re-statement of the law in a new statute could produce a set of rules which would enable acquiring authorities, landowners and practitioners to work out what compensation might be payable in any particular circumstances”

8.39 The Scottish Government agrees that the current arrangements are confusing and overly-complicated, and that a comprehensive re-statement of the law in this regard is needed. We therefore propose that the no-scheme principle should be codified on the face of any new compulsory purchase legislation. In doing so, we would anticipate needing to specify:

• what the no-scheme principle is
• the definition of ‘the scheme’ for these purposes
• matters that are to be disregarded when assessing the value of land in a compulsory purchase context
• rules to be followed when applying the no scheme principle, including assumptions about when the scheme is deemed to have been cancelled, and there being no prospect of that scheme (or similar scheme serving the same purpose) being carried out

Question 68: Should the no-scheme principle be codified in the legislation?

Question 69: If the no-scheme principle is codified, do you agree with the outline proposal at paragraph 8.39? Are there any other matters that would need to be addressed?

Planning Assumptions

8.40 As noted in paragraph 8.14 to 8.18, the 1963 Act sets out various assumptions to be made about planning permission for development which accords with the relevant development plan. The Scottish Law Commission’s Discussion Paper pointed out that the provisions were enacted in the context of the planning legislation and planning system of the middle of the last century. As a result, the planning assumptions are clearly outdated and difficult to apply to the style of development plans that now exist.

8.41 Since the Scottish Law Commission’s review, the Planning (Scotland) Act 2019 has introduced further changes to the development planning regime in Scotland, and the fourth National Planning Framework (NPF4) now forms part of the statutory development plan. Furthermore, new tools for promoting and consenting development (Masterplan Consent Areas) have been recently introduced, which could have implications for compensation.

8.42 Accordingly, the Scottish Government considers that the planning assumptions require to be repealed and re-written so that they reflect Scotland’s planning system in the 21^st Century.

Question 70: Should the planning assumptions be repealed and re-written?

8.43 Our intention is to ensure that, as far as possible, the reformed planning assumptions would reflect the principle of equivalence. That is to say, the assessment of compensation would consider what (if any) alternative development would have been granted planning permission had it not been for the compulsory acquisition. We would need to ensure that the risks, uncertainties and costs of implementing any such alternative development are taken into account (as they would be in an open market transaction) – and these reflected in the compensation paid.

8.44 We are conscious that in 2011 the UK Government reformed the planning assumptions in England and Wales, but these have since been amended. This is partly due to a concern that under the 2011 provisions – whether intentionally or not – alternative developments which only had a prospect of being granted at a future date were treated as being a certainty. The suggestion was that this had the effect of inflating compensation artificially because in a market transaction, such uncertainty as to the likelihood of planning permission would be apparent in the valuation.

8.45 Based on the above, our view is that the reformed planning assumptions would provide that when compensation is assessed, account may be taken of:

• any planning permission which is extant at the valuation date
• any development (specified in a CAAD or otherwise) which would have been granted on the valuation date, if not for the CPO
• the prospects of planning permission being granted for other development on or after the valuation date

8.46 We also anticipate that it would be necessary to specify various assumptions that are to be made when determining the prospects of planning permission being granted for other development. In particular, assumptions would need to be made regarding the cancellation of ‘the scheme’ to ensure the reformed planning assumptions are consistent with the no-scheme principle. Unlike with the current planning assumptions, we do not consider that permission should be assumed for the acquiring authority’s proposals.

Question 71: Do you agree with the broad outline for how the planning assumptions might be reformed set out in paragraphs 8.45 to 8.46? Do you have any comments on the proposed changes to the planning assumptions?

8.47 At paragraphs 8.26 to 8.35, we asked about whether compensation should ignore land’s development potential and planning prospects in certain circumstances. Clearly, if provision were made for such exceptions then the planning assumptions (including those derived from CAADs) would not apply in those cases.

Certificates of Appropriate Alternative Development

8.48 CAADs provide a statutory process for establishing what developments would (or would not) have been granted planning permission in the absence of the acquiring authority’s scheme. The procedures involved – including their interaction with the statutory planning assumptions – are complex.

8.49 Applying for and determining CAADs can be costly. We have heard from stakeholders that in some cases which have been settled at the LTS, CAADs have ultimately had limited impact on the outcome in compensation terms.

8.50 In practice, we can see that it may be challenging for planning authorities to determine CAAD applications, which involve making hypothetical judgements about notional development proposals. This may be particularly difficult in relation to schemes which a planning authority has had limited involvement with, such as major infrastructure projects that are consented outwith the usual planning application procedures. On the other hand, in cases where the planning authority is also the acquiring authority, we can see there may be a perception of a conflict of interest.

8.51 The Scottish Law Commission’s review included some potential ideas for how the CAAD process could be improved (e.g. appeals, time limits and assumptions to be made regarding cancellation of the scheme). However, at this stage we are interested in views on the more strategic question of whether CAADs are an effective, efficient and equitable way of establishing what, if any, development value exists outwith the CPO scheme. And more fundamentally: are they needed?

8.52 As set out in the preceding paragraphs, we propose to retain claimants’ general right to market value and to modernise the planning assumptions. Under that framework, the development and planning prospects of land would still be taken into account when compensation is assessed. The question is whether a statutorily-prescribed certification process is needed for that purpose. In other words, if CAADs were abolished, it would remain open to parties negotiating compensation to consider what developments would have been consented in the absence of the CPO – and the planning authority’s views could be sought as necessary. But such negotiations would take place on a non-statutory basis. Where there is a dispute about planning prospects, and this goes to the value of compensation, this would be settled at the LTS – rather than CAADs being appealed to the Scottish Ministers.

Question 72: Should CAADs be retained as a tool to establish development value in a CPO context, or should they be abolished? Please explain your reasons.

Question 73: If CAADs were to be retained, how could they be made more effective, efficient and equitable?

Planning permission for additional development

8.53 Although we understand the current provisions are rarely used, the prospect of ‘second-bite’ compensation arising up to ten years post acquisition creates additional uncertainty and budgeting challenges for acquiring authorities. Furthermore, the planning prospects of land subject to compulsory purchase are taken into account when compensation is assessed via the statutory planning assumptions. We therefore propose to repeal Part V of the 1963 Act.

Question 74: Should Part V of the 1963 Act be repealed and not re-enacted?

Injurious Affection

8.54 This element of compensation applies where only part of the claimant’s land is acquired compulsorily, and they retain part of it. There are two aspects:

• the reduction in the market value of the retained land as a result of the development activity or intended use of the development^[28]
• severance, which is the impact on the market value of the retained land of the removal of the acquired land

8.55 Severance may occur, for example, where a new road cuts through agricultural land, causing difficulties with access between the two parts, or where a reduction in the amount of land held by the claimant has an impact on what business activities can be accommodated or how they are co-ordinated. It is not necessary for the acquired land and the retained land to be next to each other, nor for them to be held under the same title, nor for the claimant to be owner and occupier of both. It is only necessary that they are held at the same time and have a connection.

8.56 Acquisition of part of a parcel of land may result in various losses, such as a loss of profitability or the cost of works to remedy the impact, for example making a new access. As a result, there can be overlap or confusion between injurious affection and disturbance. It may be helpful for new legislation to clarify that injurious affection (including severance) applies only to the depreciation caused to the market value of the retained land, and other losses should be considered under disturbance. All losses should be appropriately compensated, without duplication, to implement the principle of equivalence, but each element should be clearly identified.

Basis of valuation

8.57 The no-scheme principle does not apply to the assessment of injurious affection, since this element of compensation specifically relates to the impact of the development scheme. In addition, the 1973 Act makes clear that the depreciation for which compensation may be paid relates to the effect of the whole of the scheme; previously injurious affection could only be based on depreciation attributable to the use of the acquired land in connection with the development scheme.

8.58 Valuation of the retained land is carried out as at the date of severance, which under a GVD-style mechanism is the date of vesting of the acquired land. It can be helpful for the acquiring authority to visit the land at an early stage, if possible, to see the condition of the property before vesting. Some have argued that events occurring after the date of vesting should be able to be taken into account, such as grant or refusal of planning permission. However, these could result in either a higher or a lower value, and would in all cases cause further delay and uncertainty to both parties.

8.59 There are two possible approaches to the assessment of compensation for injurious affection. “Concurrent” valuation involves valuing the acquired land, and separately valuing the depreciation caused to the retained land. The “before and after” approach is carried out by determining the value of the whole of the land before the acquisition (“no-scheme world”), and deducting the value of the remaining land after the acquisition (“scheme world”).

8.60 The Scottish Government’s fifth Guidance Note for Acquiring Authorities briefly indicates that the “before and after” approach should be used. The Scottish Law Commission’s Discussion Paper suggested that the “before and after” approach should be set out in law as the required option. However, both their responses and our discussions with stakeholders indicate that there are a small number of cases where the concurrent approach is more appropriate. We therefore propose to leave this as a matter for guidance, to allow flexibility, rather than legislation.

Question 75: Do you agree that the method of valuation for injurious affection should be dealt with in guidance rather than set in legislation?

Set-off of betterment

8.61 Betterment is the opposite of injurious affection: it refers to the increase in value of retained land as a result of the development scheme for which the land is acquired. The Town and Country Planning (Scotland) Act 1959 established a general rule, later consolidated into the 1963 Act, that the compensation due to the claimant is reduced by the amount of any betterment – described as “set-off” of betterment. Cases involving betterment are not common, but where they do occur the claimant may receive little or no compensation for the land taken, as a result.

8.62 The set-off of betterment is part of the principle of equivalence, aiming to leave the claimant no worse off nor better off than before the compulsory acquisition. However, it can be seen as unfair in comparison to the owners of neighbouring land, who have not been subject to CPO. If neighbouring land increases in value, those owners are not required to return any of that benefit to the authority developing the scheme. Where the development causes depreciation in the value of land, those neighbouring landowners may have a claim for compensation under Part 1 of the 1973 Act.

8.63 On the other hand, it can be argued that betterment is created (in most cases) by public expenditure on the development project. Setting it off against compensation can reduce the amount the acquiring authority has to pay, effectively recouping some of that expenditure. This is therefore a question of fairness from another angle.

Question 76: Should set-off of betterment continue or be removed from the legislation? Please explain your views.

Accommodation works

8.64 In some cases, the acquiring authority may carry out works on the retained land, with the owner’s / occupier’s agreement, to mitigate the impact on the value of the retained land, such as erecting a fence, or installing sound-proofing measures in affected buildings. They may also give undertakings about how the acquired land is to be used, to limit the impact. Such actions are taken into account when assessing compensation, and will reduce the amount of financial compensation for injurious affection.

8.65 Accommodation works are currently carried out on a voluntary, case-by-case basis, depending on individual circumstances. The SLC Discussion Paper considered whether they should be given a statutory basis. In our view, the need to agree what is to be provided, and issues such as obtaining planning permission, mean that it would be impractical to require acquiring authorities to carry out such works. As far as we are aware, there is also no need to make new provision to allow them to do so on a discretionary basis. We therefore do not intend to include any provision for accommodation works in future legislation.

Question 77: Please provide details of any acquiring authorities which you believe would need new powers to enable them to carry out accommodation works on a discretionary basis.

Disturbance

8.66 As set out at the beginning of this chapter, there is no statutory provision for compensation for disturbance. The Acquisition of Land (Assessment of Compensation) Act 1919 set out the six rules for the assessment of compensation, now restated in section 12 of the 1963 Act.

Rule 2 states that:

“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”

Rule 6 states that:

“The provisions of rule (2) shall not affect the assessment of compensation for disturbance or any other matter not directly based on the value of land.”

8.67 Rule 6 does not confer a right to compensation for disturbance or other matters, but assumes that one already exists. By excluding it from the “willing seller” concept of rule 2, it recognises that the purpose of disturbance compensation is to recognise the additional costs caused by the compulsory nature of the purchase.

8.68 Since it cannot attach to injurious affection, as that only applies to cases where the landowner retains some land, disturbance has had to be interpreted as part of the value of the acquired land. This results in a number of complications which are addressed in this section. It also means that LBTT (formerly stamp duty) is payable on the total amount of compensation for market value plus disturbance.

Links between disturbance and market value

8.69 Case law requires that disturbance payments are assessed on the same basis as the market value of the land, in terms of its proposed use. This is based on Horn v Sunderland^[29] in which the owner sought valuation of the land as ready for development, but also disturbance for removing his farming business elsewhere. The majority opinion was to reject the claim for disturbance, as the owner would have had to move anyway to realise the development value. The judgement stated “It is a mistake to construe rules 2 and 6 as though they conferred two separate and independent rights, one to receive the market value of the land and the other to receive compensation for disturbance, each of which must be ascertained in isolation”.

8.70 However, a dissenting opinion (by Goddard LJ) noted that the owner would also have to move if he was selling the land at agricultural value, and in that case the majority opinion would have been that he was entitled to disturbance. Rule 6 explicitly removes the willing seller hypothesis, making a clear distinction between these two elements of compensation.

8.71 There is also a question of when disturbance compensation should be valued. Where a GVD is used, the valuation date for the acquired land is the date of vesting. However, this is when the acquiring authority takes entry, or before it does so, and therefore before the disturbance occurs. It may also be difficult to establish the full amount of disturbance losses until some time has passed, particularly in the case of relocation of a business where issues such as loss of profits are to be assessed.

Options and proposals

8.72 In the interests of clarifying and simplifying the legislation, it seems clear that separate statutory provision should be made for compensation for disturbance. This would remove the link with the market value of the acquired land and make the associated legal contortions unnecessary, while retaining the overall principle of equivalence. Rule 6 would no longer be needed if compensation for disturbance is no longer connected with market value.

8.73 We propose that compensation for disturbance should be simply based on the actual costs reasonably incurred by the seller, and should be determined when sufficient time has elapsed to allow the extent of the loss to be quantified.

Question 78: Do you agree that separate statutory provision should be made for compensation for disturbance? If not please explain your reasons.

Disturbance principles

8.74 Since there is at present very little statutory provision relating to disturbance, various principles have been established through case law, including some which are derived from the law of damages. We are interested in views on the extent to which these should be set out in statute (which may be difficult to draft with sufficient flexibility), or in more detailed guidance.

8.75 The Shun Fung^[30] case set out three conditions which must be satisfied for a claim for disturbance compensation to succeed:

• there must be a causal connection between the acquisition and the loss in question (causation)
• the loss must not be too remote (remoteness)
• the loss or expenditure must not have been incurred unreasonably (mitigation)

8.76 These concepts are closely linked and effectively all come back to whether the loss can reasonably be considered to be caused by the acquisition, but they provide a framework in which to consider the key issues.

Causation

8.77 Causation requires the claimant to show that the loss occurred as a result of the compulsory purchase. The Courts have considered at length whether costs incurred before the date of acquisition can be said to be caused by the acquisition, but Shun Fung established that they can be. Taking entry or vesting may occur at a point in time, but compulsory purchase is a process which takes, at a minimum, several months, and it is entirely reasonable for a person to take steps to prepare for their dispossession. Taking such steps early may also help to mitigate the costs (see paragraph 8.86).

8.78 The question then is: when does the right to disturbance compensation begin? Costs such as legal advice or loss of profits may start to be incurred as soon as it becomes known that there is a possibility of compulsory purchase. This will often be before any formal action is taken. We propose that compensation for disturbance should be payable for costs incurred from the date of publication of the notice of making of the CPO. This is the first formal notice of the extent of the land that may be acquired. The duty to mitigate loss should also run from the same date. This means that the notice will need to be accompanied by information about compensation, to ensure that those eligible for compensation are aware of the mitigation duty.

8.79 A further question is whether compensation should be payable for costs incurred in relation to a CPO project even by those who do not ultimately have any land acquired, or if the project fails to proceed. If the right to compensation starts from the CPO being made, it will be limited to those who have a firm expectation that their land will be acquired, excluding land in the wider area which may have been considered at earlier stages.

Question 79: Should compensation for disturbance be able to cover losses incurred from the date on which the notice of making of the CPO is published (and the claimant’s duty of mitigation should apply from the same date)? If not, from what date should compensation apply? Please explain your reasons.

Question 80: Should compensation for disturbance be payable to those who have a compensable interest in land included in the CPO when it is made, even if that land is not ultimately acquired?

Remoteness

8.80 The principle of remoteness examines whether a loss is truly caused by the dispossession of the owner or occupier of the property. There are three elements to this; the first two issues relate to who can claim compensation.

8.81 Section 17A of the 1963 Act provides for compensation for an “investment owner” who does not occupy the property, where another property is bought within a year. However, this does not cover all potential losses for such owners. It is suggested that a wider range of compensation could be available, which could cover, for example, a longer time-frame to acquire a new property, loss of rental income, borrowing costs if there is a delay in receiving compensation, etc. It may also be appropriate to allow compensation for a non-occupying owner who incurs costs where only part of the land is acquired.

Question 81: Should owners who do not occupy the property be able to claim a wider range of disturbance compensation than at present?

8.82 The second issue is corporate structures, which may mean that not all the companies which incur losses are entitled to compensation, due to complex leasing arrangements. In some cases courts have found it appropriate to investigate those structures to determine what costs can be included in compensation (“piercing the corporate veil”). It is likely to be difficult to legislate clearly on the issue of corporate or family business structures, but guidance might be helpful.

Question 82: Would it be helpful to provide guidance on compensation in cases of complex corporate structures?

8.83 The third element of remoteness is ‘impecuniosity’. Established in a case for damages in 1933^[31], this provides that compensation is not due where a loss is attributable to the claimant’s poor financial circumstances rather than directly to the cause of the damage. This would relate to items such as higher costs for borrowing due to a poor credit score, or interest charges or hire costs because the claimant is unable to pay for something up-front. The principle has been applied in compulsory purchase cases, such as Bryce v Motherwell District Council^[32].

8.84 The concept of impecuniosity conflicts with the more modern recognition that “it’s expensive to be poor”. More recent case law on damages has indicated that the courts are less inclined to apply the impecuniosity rule. In a 2003 case relating to a road traffic collision^[33], the House of Lords held that it was “reasonably foreseeable” that some people would be unable to pay car hire charges up front, and it would be unfair to attribute the extra cost of using credit to the victim’s choice rather than to the person who caused the collision.

8.85 It seems clear that some people affected by compulsory purchase will need to incur higher costs than others to reach a state of equivalence, and therefore such losses should be recoverable. We propose that new guidance or legislation should make clear that compensation should cover costs which are reasonable in the claimant’s individual circumstances, without reference to impecuniosity.

Question 83: Do you agree that the impecuniosity rule should be removed?

Mitigation

8.86 Mitigation is an expression of the requirement that loss or expenditure claimed must not have been incurred unreasonably: the claimant is expected to take steps to mitigate their loss. For example, they might take early action to look for a new house or premises, to increase the chance of finding something suitable and avoid short term rental or storage costs, or the expense of significant remodelling. Another example would be if a claimant needs to use a removals company to help them move, they can mitigate their loss by obtaining quotes from more than one firm and (assuming they offer equivalent levels of service) appointing the cheapest option.

8.87 The personal circumstances of the claimant are not currently taken into account in determining what mitigation actions are reasonable. This could potentially be considered unfair, for example if a person’s age, health or family circumstances limit the steps they can take. While retaining the overarching principle of equivalence, we propose that claimants should be able to receive compensation for the effect of the compulsory acquisition on a person in those particular circumstances, and the steps to be taken to mitigate loss should be those that a reasonable person in those circumstances would take.

Relocation and extinguishment

8.88 When a business property is being compulsorily acquired, in most cases it will be possible for the business to relocate to other premises. Compensation for disturbance may be claimed for costs such as searching for new premises, adapting the new premises, removal costs, temporary loss of profits, loss of goodwill etc.

8.89 In some cases it will not be reasonably possible to relocate the business because of a lack of suitable premises available or unique features of the business tying it to a particular location. In these cases the business will be extinguished, and compensation will be assessed on the value of the business as a going concern.

8.90 In most cases compensation for extinguishment will be higher than relocation costs. However, in Shun Fung it was established that relocation compensation may be paid even where it exceeds the total value of the business, if the costs are shown to be reasonable.

8.91 This also connects to the question of personal circumstances in mitigating loss. Section 43 of the 1973 Act provides that where a person is 60 or over when their land is acquired, disturbance compensation may be assessed on the basis of extinguishment rather than relocation, provided they give undertakings that they have not and will not sell the goodwill in the business, nor will they set up a similar business in the same area themselves. On the other hand, some cases have found that a person is required to take steps to relocate their business, in order to mitigate the loss, despite being in poor health. This distinction seems entirely arbitrary. We consider that individual circumstances should be able to be taken into account in determining whether it is reasonable for a person to relocate or extinguish their business, with no particular age limit.

8.92 In summary we propose that:

• disturbance compensation for a business should be based on the costs of relocation unless the claimant can show that it should be on the basis of extinguishment
• all reasonable costs of relocation may be compensated, even if they exceed the total value of the business
• the claimant’s personal circumstances may be taken into account in considering what disturbance costs are reasonable

Question 84: Do you agree with the proposals on mitigation, including compensation for business relocation and extinguishment? Please add any comments on these issues.

Disturbance payments

8.93 This section has so far dealt with “disturbance compensation” for those who have a compensable interest in acquired land. For occupiers who do not have such an interest but are in possession of the land at the relevant date, section 34 of the 1973 Act provides a right to a “disturbance payment”. This would cover the reasonable expenses of removing from the land and any business losses due to the disturbance. Section 34(4) also allows the acquiring authority to make a discretionary payment to anyone who is displaced but does not meet the criteria to be entitled to a payment. The amount of the payment is to be determined in the same way in both cases; in other words, discretion only applies to whether to make a payment, not the amount. These payments would apply, for example, to tenants without a formal lease, depending on their particular circumstances.

8.94 Under section 35(4), “Any dispute as to the amount of a disturbance payment shall be referred to and determined by the Lands Tribunal.”. However, the LTS has found that this only applies to mandatory disturbance payments. For discretionary payments the only remedy would be judicial review. We therefore propose that the jurisdiction of the LTS should be extended to cover discretionary as well as mandatory disturbance payments.

Question 85: Should the jurisdiction of the LTS should be extended to cover discretionary as well as mandatory disturbance payments?

Loss Payments

8.95 Loss payments are an additional payment recognising the distress and inconvenience that may be caused to those who are displaced as a result of compulsory purchase. In this sense, they seek to address non-financial loss and as such arguably go beyond the principle of equivalence. The provisions are set out in the 1973 Act, which provides for two types of loss payment: Home Loss Payments (HLP) (sections 27 to 30) and Farm Loss Payments (FLP) (sections 31 to 33). This section deals with each of these in turn.

Home Loss Payments

8.96 HLP are paid where a person is displaced from a dwelling. This includes where a dwelling is the subject of compulsory acquisition – but they are payable in other circumstances too, for example in relation to requirements for demolition, housing orders and improvement works in certain circumstances. They are not payable to non-resident landlords.

Qualifying Criteria

8.97 HLPs are payable to a person who has occupied the dwelling for a period of one year ending with the date of displacement, and it was their only or main residence. That occupation must also be by virtue of a relevant interest or right. The 1973 Act makes provision for HLP where properties are acquired by agreement.

Calculation of Amount: Home Loss Payment

8.98 Where a person is in occupation of a dwelling by virtue of an ‘owner’s interest’^[34], the amount of HLP is 10% of the market value of the interest acquired. This is subject to a maximum payment of £15,000 and a minimum payment of £1500^[35].

8.99 In any other case (e.g. tenants) a flat rate of £1500 applies. Scottish Ministers have powers to alter the minimum, maximum and flat-rate amount through secondary legislation.

Options and proposals

8.100 Loss payments are paid to occupiers, including both owner-occupiers and tenants. Non-resident landlords are not entitled to an HLP. The focus on occupiers reflects that the purpose of loss payments is to provide additional compensation for the distress and inconvenience of being displaced, which is felt most acutely by who live in the affected property.

8.101 We are not minded to substantially alter the qualifying criteria, which we consider to be broadly appropriate given the role of HLP. We would, however, be interested in views on whether the minimum length of residence should potentially be increased. The Scottish Law Commission raised the question of whether the current one-year requirement was potentially too short to discourage ‘opportunistic buyers’ from acquiring properties that are subject to compulsory purchase in order to obtain potential payments. It is not clear that this is an issue in practice.

Question 86: Should the minimum period of residence necessary to qualify for a HLP (currently one year) be increased? If so, what should the period be, and why?

8.102 As regards how HLP are calculated, the Scottish Law Commission recognised that a standardised approach of some sort is needed: seeking to make individual calculations based on individual circumstances would be inherently subjective, complex and uncertain. The question is what that standardised approach should be.

8.103 It is not clear to us that the current approach of directly linking the amount of HLP to the value of the property acquired is the most equitable approach. As noted, loss payments are an acknowledgement of inconvenience and distress that may be caused by compulsory displacement. The current approach, where the payment amount is 10% of the value of the interest (subject to minimum and maximum levels), arguably implies that those with more valuable property experience higher levels of hardship.

8.104 We are therefore interested in potential alternative methods for calculating HLPs and have identified the following broad options:

• Option 1 – Retain the current approach: 10% of market value subject to minimum and maximum amounts for those occupiers with an owner’s interest and a flat rate for others.
• Option 2 – Flat rate: all displaced occupiers are entitled to the same fixed amount, regardless of tenure or property value.
• Option 3 – Graded rate: link the amount to length of occupation.

8.105 With all options, we would envisage that Scottish Ministers would continue to have a power to amend the relevant amounts or rates via secondary legislation.

8.106 Option 1 has the advantage of being established and therefore familiar. Under the current approach, owner occupiers of more valuable properties receive more, which may be regarded as unfair given the purpose of loss payments. The link to market value may result in delays in cases where the value of the property is disputed.

8.107 Option 2 would arguably be fairer given purpose of HLPs: it does not equate distress and inconvenience with the value of the property or length of tenure. It would make the HLP amount predictable for both acquiring authority and those being displaced, and allow earlier settlement. On the other hand it implies the subjective non-financial matters are the same for everyone.

8.108 Option 3 recognises that distress may be more associated with how well established an occupier has become than value of the property. Like Option 2 it would make HLP more predictable and allow earlier settlement. However, the implied assumption that those who have occupied a property for less time experience less distress and inconvenience may be regarded as unfair.

8.109 There is an inherent challenge with any mechanism that involves placing a financial value on something subjective and personal. In that sense, we have to recognise that any approach is going to be arbitrary to some extent. However, our view is that a flat rate set at a reasonable level would be a simpler and fairer basis for calculating HLP than the current approach. Furthermore, a flat rate already applies to those who do not have an ‘owner’s interest’ in the property. On this basis, Option 2 is our preferred option although we would welcome views on the pros and cons of this and other potential approaches.

8.110 At this stage we are looking to establish the principle of how HLP ought to be calculated in future. Whichever approach is taken forward, further detailed work would of course need to be carried out to determine what the specific amount(s) should be.

Question 87: How should the amount of HLP be calculated, among the options discussed in paragraphs 8.104 to 8.110?

Please add any comments on these options or other approaches.

Farm Loss Payments

8.111 FLP are payable to farmers who are displaced as a result of compulsory acquisition. However, as set out below, the qualifying criteria are narrowly drawn and the method of calculating the amount of the payment is complex.

Qualifying Criteria

8.112 Where a CPO contains land which is, or is part of, an agricultural unit^[36] those occupying the unit with an ‘owner’s interest’^[37] are entitled to receive a FLP where:

• they are displaced from the land as a result of the whole or a ‘sufficient part’ of their interest being compulsorily acquired, and
• not more than three years after the date of displacement they begin to farm another agricultural unit elsewhere in Great Britain

8.113 For these purposes, a ‘sufficient part’ is defined as not less than 0.5 hectares, although Scottish Ministers may specify an alternative area through secondary legislation.

Calculation of Amount: Farm Loss Payment

8.114 The amount of FLP under the 1973 Act is equal to the average annual profit derived from the agricultural use of the agricultural land acquired. This is calculated with reference to profits for three years ending with the date of displacement, or, if shorter, the period of occupation.

8.115 The actual calculation is subject to a number of provisions, for example:

• altering the date of displacement depending on the availability of completed accounts
• requiring the deduction of a notional rent
• leaving out profits from activities for which a loss is compensated for by a disturbance payment
• requiring the FLP to be reduced proportionally in certain circumstances

Options and proposals

8.116 The current FLP provisions are in need of change. The methodology for calculating the value of the payment seems overly complicated, and under the current qualifying criteria it is entirely possible that a person could be displaced and yet not be eligible for a FLP.

8.117 As a minimum, we therefore propose to remove the requirement to begin farming in another location within three years. We are also interested in views on the ‘sufficient part’ criterion: specifically, whether there should continue to be a minimum area of land below which a FLP is not payable.

Question 88: If a person is displaced from an agricultural unit as a result of compulsory purchase, should they be eligible for a loss payment regardless of whether they continue farming elsewhere?

Question 89: Should there continue to be a minimum area of land (currently 0.5 hectares) below which a FLP is not payable? If yes, what should the minimum area be?

8.118 With regard to the amount FLP, our starting point is that the current approach of using profits as the basis for a calculation, should be replaced with a simpler and fairer approach. We think the broad options are:

• Option 1 – Market rate: base the amount of FLP on a proportion of the market value of the land acquired.
• Option 2 – Flat rate: all those displaced get the same amount, similar to the approach proposed above in respect of HLP, perhaps subject to a minimum size threshold.
• Option 3 – Area-based rate: base the amount on the area of land and buildings acquired (calculated at a fixed rate per hectare and per square metre respectively).

8.119 As with HLP, it must be recognised that any mechanism that involves placing a monetary value on non-financial losses will to some extent be arbitrary. We are interested in views on what method of calculation might be most appropriate in the context of agricultural land – and whether there are reasons for taking a different approach from HLP.

Question 90: Do you agree that we should move away from the current profit-based approach to calculating FLP?

Question 91: If a new approach to calculating FLP is taken forward, which of the options outlined at paragraph 8.118 would you prefer?

8.120 The Scottish Law Commission’s commentary on FLP noted that agricultural landowners may encounter ‘peculiar difficulties’ as a result of compulsory purchase – being relatively more difficult to relocate and potentially dependent on a specific area of land. We nevertheless recognise that the owners of businesses other than farms may experience stress and inconvenience when displaced as a result of compulsory purchase. We are therefore interested in views on whether a more general loss payment for other types of non-residential land should be introduced, instead of or in addition to FLP.

Question 92: Should loss payments be extended to other non-residential interests displaced as a result of compulsory purchase? Please explain your views.