How to Capture Land Values under the Current Rules

It is very likely at some point in the next couple of years that clauses of the Land Compensation Act 1961 will be reformed (the Letwin Review and the MHCLG Select committee report may prompt it) so that something like EUV+20% becomes the norm (as the viability annex to the draft NPPF almost reaches) – at least for newly allocated as opposed to existing sites.  I’m sure that there would be little opposition to a ‘profit sharing’ partnership arrangement (say 80:20 in favour of the public sector) available to landowners who sign up rather than fight all the way to CPO.

As EJEU caselaw and systems on the continent confirm there is no Human Rights objections to such systems as long as landowners suffer no material losses and the CPO scheme is superior to that without.

There are however techniques that can be used to capture such value under the existing CPO rules – especially as rationalised under the Neighbourhood Planning Act 2017, which arn’t universally known by planners, as sadly confirmed by the inspector for North Essex Garden Communities.

This is key as the viability of strategic developments, whether Garden Communities or any other form, is now critical.  Long gone are the days  when structure or regional plans could allocate large blobs without any real economic or infrastructure costing. A key (though vacuous) line of attack against these proposals is that they wont be viable, that land acquisition costs will create high ‘peak debt’ (to use the governments new phrase)  Which will then cripple the discounted cash flow.

‘Ah Mr Howard’, as the QV for CAUSH (Campaign against Urban Sprawl in Herts) asked at the Letchworth Examination ‘This masterplan by Raymond Unwin is all very well but where is you discounted cash flow calculations’?

I jest however progress in the early years of Letchworth was slow because it did not have access to loans at public sector rates, contrasted to the rapid progress of the 1st gen New Towns which did.  There is no State Aid consequences where as on the continent preparation of strategic land for development is considered a nationalised duty of the state.

The key here is to understand the ‘No Scheme World’ and the ‘Pointe Gourde’ principle

in that case a quarry was acquired for the purposes of building a naval base, but that quarry included stone which would be particularly of value or useful to the acquiring authority in building said naval base. Thus, if the naval base were being constructed elsewhere on the Isle of Trinidad the quarry owners might have exploited their strategic market position in selling the stone to the acquiring authority for the construction. However, where the acquiring authority were acquiring the whole quarry the owners of that quarry were unable to benefit from that windfall. In that case it was found as fact that only the acquiring authority, or a similar undertaker would be in a position to avail itself of this benefit, and as such any potential uplift in value as a result did not fall within the definition of market value.

Pointe Gourde Quarrying & Transport Co Ltd v SubIntendent of Crown Lands (Trinidad) [1947] AC 565, which is a decision of the Privy Council. In that case, Lord MacDermott said at page 572 that:

“It is well settled that compensation for compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying that acquisition.”

The substance of the Pointe Gourde principle in reverse is that where the ultimate resumption of land is part of a scheme to take the subject land for a public purpose, planning restrictions which are part of that “scheme” should be disregarded when valuing the land that is taken.

This is known as the ‘no scheme world’.   Any special suitability of the land taken for the purpose of the acquiring authority is not to be taken into account

Take the Olympics for example, much of the land subject to CPO for example would have taken decades to come forward and might not have come forward at all without the infrastructure as part of that project.  The end result of the land tribunals etc. cases here was that whilst existing use value was too low as the basis for compensation the amount and scale of residential would be significantly higher in the scheme world.

The law on this has been clarified following publication of the Law Commission’s report: ‘Towards a Compulsory Purchase Code’ which was included in the Neighbourhood Planning Act 2017 and Housing and Planning Act 2016 which came into force this year, which included Broadening of the definition of the ‘scheme’ to allow the identification of specified transport infrastructure projects that are to be disregarded within a defined area, over a defined period of time.

The key addition was the extension of the definition of the scheme to allow for specific transport infrastructure projects to be disregarded. The reason for this change was to prevent those owners facing a CPO for, say, a regeneration scheme securing increased compensation for their site when that increased land value could be attributed to a transport scheme, such as a new road which opened up that site for redevelopment.

Lets look at a real world example, South Anywhere County is preparing a Joint Strategic Plan.  It assesses through SEA, A ‘Plan a’ which involves CPO and land value capture for strategic locations funding infrastructure (or government funding in default) and a  a ‘Plan b’ which involves no CPO and hence no contribution for land value capture (and no government funding in default).  The plan b might involve conventional medium scale urban extensions.  The plan a might involve larger scale new communities.

The key here is that the plan a sites and the plan b sites overlap as little as possible.   Then the plan a sites will be valued at existing use value + compensation.

Of course SEA considerations might mean some overlap is inevitable, but under the current rules the less overlap you have the more you can fund affordable housing and infrastructure through land value capture.

The ‘plan a’ ‘plan b’ approach will also heighten the case for government infrastructure funding,   Without funding of the new rail crossing South Anywhere JSP can support 70,000 new homes, with it it can deliver 100,000.  For example.  This means all of the direct and indirect benefits of the additional 30,000 homes can be fully included in the CBA for the new infrastructure.  Finally the calculations can include the additional affordable housing and infrastructure that could be constructed on the ‘overlap’ sights that would be developed anyway in the ‘no scheme world’ including many urban brownfield sites that don’t have excessive delivery costs.

what all of this means is that viability, planning and infrastructure delivery concerns must all be aligned from the outset in any strategic planning exercise.  You can only do an infrastructure strategy and viability study at the end of the process and after SEA.  They need to be iterated at all stages in the process.