How to Minimise Compensation

As we know, compulsory purchase can be a draconian process that can create a hostile atmosphere between the acquiring authority and the claimant.  Often, the cost of acquisition can be far more than what the acquiring authority anticipated.  The process and the cost can leave the acquiring authority asking itself some difficult questions: 

• Why are compulsory purchases so expensive?
• Why is the budget figure inaccurate?
• Why is the cost of compensating occupiers so difficult to estimate? 
• Why does compensation appear to be loaded in favour of the claimant?
• How can we get claimants to make more reasonable claims?
• Why is the cost of professional fees so exorbitant?
• Why do claims take so many years to resolve?

Here we look at 8 top tips which we believe are essential for an Acquiring Authority to follow in order to reduce its liability and exposure to compensation claims.

Tip No. 1: Watch the Red Line

First of all, the Acquiring Authority MUST understand the scheme and aspirations of the promoters (or Development Partner if working in partnership).  It is necessary to understand technically what land is needed to make the scheme work.   Challenge the Scheme promoters to ensure they understand the difference between “need and want”.  It is all well and good to have a significant master plan, but ultimately, if this leads to areas being acquired that are not necessary for the success of the scheme, then this could result in the scheme costs exceeding expectations.  In addition, acquiring land that is not required  could undermine the comprehensive nature of a CPO and result in the CPO itself being open to challenge at Inquiry.   

Having established the aspirational Red Line, research the proposed Order Land.  Look at the nature of the area and uses; not everything is as it seems!  An example of this occurred when acting on the Mersey Gateway scheme in Runcorn.  We acted when acting for a multi-national company that occupied a typical 10,000-square-foot industrial unit.  Externally, the premises looked like a typical industrial unit, but inside there were production lines manufacturing pure silica, which was sold for a significant profit!  Accordingly, negotiations with the Acquiring Authority were set around how the compensation could be minimised to avoid a loss of profit claim.

Research of the area will also reveal those properties where there is a potential for injurious affection or material detriment claims.  Alternatively, undertaking due diligence could identify consecrated land and places of worship which have their own specific compensation regime under Rule 5 of Section 5 of the Land Compensation Act 1961.  As a result, would it be more beneficial to exclude such properties from the Red Line?   

Tip No. 2: Get the Budget Right

When assessing the land acquisition budget, be pragmatic and, as identified in Tip No. 1, undertake as much due diligence as possible.  This will enable the Acquiring Authority to deal with challenges at an early stage.   Review the budget on a regular basis so as to ensure appropriate planning can be undertaken to reduce the pressure on budget constraints.  

Most importantly, challenge your property team on the assumptions adopted in establishing the acquisition budget.  Have they adopted the correct basis of valuation, reflected necessary planning policies, etc?  

Tip No. 3: Engage with and Understand the Claimant  

Engagement with the Claimant is essential, especially at an early stage.   Engagement only appears once in the Guidance on Compulsory Purchase Process & the Crichel Down Rule (Feb 2018), stating “in order to reach early settlements, public sector organisations should make reasonable initial offers and be prepared to engage constructively with claimants about relocation issues, mitigation and accommodation works where relevant”.  This belies its importance.

Early communication is key, enabling the Acquiring Authority to understand the nature of the Claimant’s business or interest, how it makes money, and their personality, as well as helping manage expectations not only of the Claimant but also of their advisors!  It also helps establish any legal or physical impediments to a CPO.  

Initial meetings offer the chance to gather information at the formation stage of the CPO process, which will feed into the requisition for information at the referencing stage.

Successful engagement is dependent on the Acquiring Authority appointing a suitable professional team and consultants who can communicate effectively.  It is not just about project cost savings; the inability to communicate can delay the process and prove very costly for the Acquiring Authority. This would be a false economy in the long run.  Ensure you are comfortable with your professional team and their ability to deliver results.  

Engagement provides a framework for progressing negotiations and sets the basis for creating appropriate relocation and acquisition strategies which underpin a CPO.  As a result, acquisitions agreed in advance will ultimately reduce potential costs and save time, which is critical to the successful and speedy delivery of a CPO.

Tip No. 4: Making First Contact: The Critical Steps  

As they say, first impressions count and usually there is no second chance of getting it right!  Often, the biggest frustration for a Claimant is not knowing what is happening, details of the scheme and, most importantly, the timescales involved.  This creates uncertainty and mistrust in what is already an adversarial situation.  Advice and information in terms of the Scheme must be clear and concise.  The Acquiring Authority MUST be approachable and should not create “an us and them” situation.  Listen to the Claimant and answer the questions honestly.  This should improve the possibility of an early deal! 

Tip No. 5: Making Offers: Get it Right First Time

As we have seen, first impressions count, and the same can be said in respect to negotiations.  The Guidance on Compulsory Purchase Process & the Crichel Down Rule are informative when it comes to making offers, enabling an Acquiring Authority to consider the bigger picture, taking all costs into account.  These costs are not direct costs in terms of compensation under the Code but indirect costs such as other legal fees (dealing with individual objectors at Inquiry or potentially at Upper Tribunal),  wider scheme costs, overall cost of project delay, and other reasonable linked costs such as potential satellite litigation.  

When undertaking negotiations, another key issue is flexibility and innovation.  In addition to straightforward purchases, consider sale and leasebacks, deferred completions or other options.  Ultimately, flexibility on deals will save time and mitigate exposure to compensation over the life of the CPO.  This is an opportunity to demonstrate that CPO is the first rather than last resort!

Tip No. 6: Mitigate for the Claimant

One of the age-old questions to consider is: when is the legal duty mitigated on the part of the Claimant triggered?  There are a number of cases on this point, In Lindon Press vs West Midlands County Council (1987), the Claimant must take all reasonable steps to mitigate its loss and cannot recover any avoidable losses.  In Director of Buildings& Lands vs Shun Fung Ironworks (1995), it was held that a reasonable person in the position of the Claimant would have taken steps to eliminate or reduce the loss and if the Claimant failed to do so, then they cannot reasonably expect to be compensated for the loss. 

The legal duty to mitigate starts upon confirmation of the CPO.  The Acquiring authority, however, must not sit back and expect the Claimant to do all the work!  An Acquiring Authority must take a pro-active role and mitigate for the Claimant.  The duty is on the Acquiring Authority to demonstrate that the Claimant has not mitigated its losses.  As a consequence, work with the Claimant, engage with their needs, and undertake property searches for them.  Provide options for the claimant, and by so doing, it will assist the relocation process and reduce the risk of an extinguishment claim.  

Tip No 7: Delay Vesting

The usual process for taking possession of land is normally scheme-led and dependent upon the development timetable.

As discussed in Tip 6, the duty to mitigate on the part of the Claimant starts upon confirmation of the CPO.  Under the provisions of the Housing & Planning Act 2016, the process of taking possession has been brought into line under a General Vesting Declaration (GVD) and the Notice to Treat / Notice of Entry (NTT/NTE) route, so that an Acquiring Authority must give a minimum of 3 months under either route.  Although there was not a change to the GVD process historically under the NTT/NTE process, an Acquiring Authority could take possession on 14 days’ notice, so the ability to obtain possession quickly has been lost.

It is therefore important to establish an appropriate timetable for possession.  However, 3 months’ notice still places a significant amount of pressure on a business to relocate, increasing the potential for a successful total extinguishment claim. Consequently, in order to minimise the risk of such a claim, it is essential to give an occupier the maximum notice.  Liaise with the scheme promotor or Development Partner and review the development timetable.  Consider delaying vesting or extending the notice period under the NTT/NTE.  By giving a minimum of 6 months’ notice, this should increase protection and reduce the chances of an extinguishment claim succeeding.

Tip No. 8: Watch the Costs and Do a Deal

The presumption is that Acquiring Authorities are liable for reasonable costs.  As a consequence, and in accordance with the 2015 Guidance (as updated in 2018), it recommends the Acquiring authority look at the bigger picture when negotiating with claimants.  Typical Tribunal costs can be significant.  Below is a crude guide to the potential level of professional fees:

• Legal Fees: £50,000 plus 
• Surveyor Fees: £50,000 plus
• Forensic Accountants Fees: £100,000 plus
• Barrister’s Costs: £100,000 plus

The actual fees will largely depend on the complexity of the case.  The above, though, shows that fees can be significant.

Costs are important to consider as an Acquiring Authority could be liable for both their own and the Claimant’s.   However, whilst there should be a general consensus to dealing a deal, be prepared to fight unreasonable compensation claims!

Compulsory purchase are not designed to be easy, but the road can be made less hazardous if these tips are followed.  So to summarise:

• Early engagement with the Claimant
• Be fair with the money
• See the bigger picture
• Have the right team in place
• Assist with relocation
• Flexible timescales