compensation -

tenants' issues

Introduction

Compulsory Purchase Orders (CPOs) allow an authorised body (the Acquirer) to acquire an interest in land or property without the owner’s consent. As well as freehold property, such powers extend to a wide range of land interests, including agricultural tenancies and residential or commercial leases; other rights, such as wayleaves and easements can also be compulsorily acquired by the same process. To obtain a CPO, an Acquirer requires an Enabling Act e.g The Highways Act 1980 for a road scheme or, most recently, the Royal Assent for the HS2 Hybrid Bill anticipated next month. Utility companies also possess powers to lay cables and pipes across land, although often these companies prefer to agree terms by negotiation rather than exercising compulsory powers.  The process for obtaining a CPO can be lengthy and expensive and in many cases Acquirers prefer to negotiate terms, albeit with the CPO threat in the back ground, rather than resorting to the statutory process. The impact of a CPO on owner occupiers of farms and estates, are generally well known. However, it is very often the case that tenants of land that are most adversely affected, with their business bearing the biggest burden, particularly during construction, and this article explores these specific issues.

Access

As with any proposed scheme, inevitably an Acquirer will seek to take entry for investigatory surveys prior to a scheme commencing. Before this happens, it is vital to identify the powers that are being relied on and the rights that are contained in such powers. There is a clear distinction between agreeing access via negotiation and where powers of entry are used. With the latter, compensation is usually limited to crop losses and cost of reinstate the for the damaged area, whereas a negotiated entry will often generate higher payments. In the case of a let holding, it is the tenant that will deal with such access arrangements and who will suffer the burden of the damage caused. Thus it is essential that the tenant (or appointed agent) takes the lead in such negotiations. This said in such circumstances it is also advisable that tenants liaise with their landlords before agreeing access or any compensation offers.

What can you claim for?

The rules for compensation in compulsory purchase situations are complex and set out in section 5 of the Land Compensation Act 1961. These basic principles have been the subject of considerable litigation over the last 40 years and we now have a Compensation Code that reflects that where a party is subject to a CPO, the compensation entitlement is intended to put that party back in the position it was in prior to the scheme “as far as money can”. Furthermore, there is a principle that no party should benefit from the fact the interest is compulsorily acquired, i.e.  there is no premium payable. For schemes that involve the permanent acquisition of land, the heads of claim for a tenant are generally the same to those for the owner-occupier, with the exception that there is, of course, no claim for the value of land taken. This is replaced by a claim for the value of the unexpired term of the tenancy over the affected area, where land is acquired. Additional compensation headings include severance (where a tenanted holding is divided by a scheme) and injurious affection (the permanent impact on the value of the remainder of the tenancy interest), disturbance (temporary losses), professional fees and a contribution to the value of the claimant’s time and expenses where a loss can be proven.

Disturbance can cover a broad spectrum of issues that may be particular to a farm, for example this can range from crop loss and BPS monies foregone, to re-housing livestock or DIY liveries offsite during the works, and paying for the cost of feed and labour for such animals during that period. This can also cover the temporary relocation of subtenants where converted farm buildings are sublet and these business cannot operate during the scheme; it will also cover relatively simple issues such as paying for the cost of new farm plan or sorting out a stewardship scheme, if the qualifying points needed have been compromised.

In addition, to reflect that the interest is acquired compulsorily, under the Land Compensation Act 1973 (as amended by the Planning and Compulsory Purchase Act 2004), occupiers of farmland are entitled to claim an occupier’s payment of up to £25,000 or 2.5% of the entire compensation payable. This compares with the Basic Loss payment (paid to land owners) which is 7.5% (up to £75,000). However, under the current proposed Government review of the compulsory purchase system it has been suggested that this be reversed, because it is considered that the main burden of any scheme is borne by the occupier.

When a utility company wishes to acquire a right only, rather than permanent land take, for example an easement over land to lay a pipe or cable, and relies on compulsory powers, the tenant’s claim is usually limited to disturbance compensation only, i.e. crop losses, reinstatement and other similar matters. The easement payment reflecting the permanent diminution in the value of the land generally goes to the landowner. Notwithstanding this, utilities often offer additional payments to both owners and occupiers to incentivise an early agreement consenting to a particular project. It is not uncommon to split these payments on a 75%/25% basis between landlord and tenant. However, some tenancies, particularly more modern Farm Business Tenancies(FBTs), reserve the right for the landlord to grant such rights and to receive all of the incentive payments. Such reservations need to be considered in the context of any negotiations.

Accommodation Works

Tenants are also entitled to seek Accommodation Works from an Acquirer where circumstances warrant it. Accommodation Works are items of capital investment made by the Acquirer which mitigate the level of compensation the affected party may claim. This can apply equally to both landowners and occupiers. Examples include new access roads to a field severed form other parts of the holding, new water/power supplies, fencing and gates, and where buildings have been affected, replacement facilities such as new farm buildings, yards and livestock handling systems. The need for such mitigation works are an essential part of the early discussions that affected parties should have with an Acquirer. Claimants need to be realistic about what will be provided; if a situation arises where the cost of the required Accommodation Work is more that the likely additional compensation due then it is unlikely that the investment will be provided. A common scenario is where land is served form the main part of the holding by a road or railway and an accommodation bridge could connect the severed parts. However, the bridge could cost, say, £500,000 and the severed land could be worth, say, £300,000. In such circumstances the Acquirer would be better off acquiring the severed land at market value, rather than build the bridge. Relevant issues can include diverting a footpath over the same bridge, which helps support the cost and possible sharing the access with an adjoining owner. This cost/value scenario is even more acute when assessing a tenanted interest, particularly if a landlord is not interested in negotiating such works. Accommodation Works can be an essential part of a tenant's compensation strategy. 

How do you compensate a tenancy?

In most cases, the largest part of an occupier’s claim is likely to be for the assessment of value of the unexpired term of tenancy, which reflects the area acquired (either all or part), coupled with the severance or injurious affection on the remainder.

Under the Agricultural Holdings Act 1986, the tenant affected has a limited choice. The tenancy can be terminated by the Acquirer stepping into the Landlord’s shoes, who then serves a Notice to Quit and the rights to compensation set out within the 1986 Act will apply of 5 or 6 times the rent passing, together with tenant’s right and improvement claims. The rental calculation is offset by a deduction of 4 times the rent in accordance of S 48 of the Land Compensation Act 1973 which is then preserved as a tax free payment. This is not usually an attractive option for a tenant.

The alternative is for the tenant to be compensated directly through the Compensation Code which covers the value of the unexpired term of the particular tenancy, along with tenant right, disturbance and a “re-organisation payment” of a multiplier of 4 times the annual rent.

When assessing the value of the unexpired term of any tenancy, a valuer has regard to the terms of the tenancy, particularly its length, which is particularly relevant to shorter term FBTs and business leases. Issues such as break clauses and user restrictions are important factors. In the case of a secure 1986 Act letting, the age of the tenant and possible opportunities for succession, are essential parts of the formula.

Armed with this information, the value of the unexpired term can then be calculated in a number of ways depending on circumstances and there is no fixed method of approaching this. One approach is to look at the profitability of the holding in the ‘no scheme world’ (i.e. ignoring the CPO proposal) and comparing this to the impact suffered as a result of the proposals. This differential can be capitalised to reflect the anticipated lifetime of the tenants and any successor) or the remaining term of the lease. This has regard to the tenant’s investment in the holding, the likely rent payable and will reflect what a hypothetical party would pay to receive that income stream during the anticipated period, reflecting all of the associated trading risks.

An alternative approach; which is particularly relevant when a tenanted farm is completely acquired, either as a result of the scheme or if the tenant serves a blight notice requiring the Acquirer to purchase the whole tenancy interest, on the basis that what is left is not capable of being farmed economically; is to look at the cost of putting the tenant back in the position was in beforehand. This relocation approach reflects scarcity in the market of finding a new letting on similar terms. It could allow for the cost of buying an alternative farm of an equivalent size, granting the tenant a new tenancy on equivalent terms on a sale and lease back arrangement, and the selling the freehold subject to that new lease. The value of the unexpired term is then assessed by looking at the difference in the cost of buying the farm and thus sale price subject to the new lease.

A third approach has regard to the difference in the value of freehold land with vacant possession and subject to tenancy and dividing this difference to reflect value to the tenancy.

There are many variables to all of these approaches and the scope for debate is wide.

Minimising the impact of a scheme

As with all compensation schemes the claimant, whether landowner or tenant, is obligated to mitigate their loss to their best ability.  In respect of relocation, tenants will be expected to try and relocate their business if possible. However, with sensible dialogue with the Acquirer, it may be possible for them to assist in the relocation search.  In such circumstances relocation costs will be a relevant part of any claim. If extinguishment of an entire business is the only solution then typical items of compensation might include the value of the business’s goodwill, loss on full or part sale of stock, vehicles and plant machinery, redundancy costs and the administrative costs of winding up the business. 

What involvement can tenants have?

The need to liaise as early as possible with the Acquirer is essential. A good line of dialogue should be established early on; agreement on Accommodation Works, alternative temporary arrangements during construction and initial compensation discussion are vital. Often this should be best undertaken by a specialist surveyor or valuer, who is well used to dealing with such matters. Occupiers should also remember that it is their duty to mitigate their loss and where possible arrange for appropriate Accommodation Works and proper reinstatement of agricultural land. The latter is particularly relevant where utilities have laid pipes across land. Specific issues such as replacement land drainage need to be addressed in such circumstances.

Specialist advice is key. Without such advice there is a risk that the claimant will not be properly compensated. The Acquirer will not be the claimant’s friend and inevitably will be looking to implement the scheme for the least possible cost. You must always be mindful of this.

 

This article was recently published by Farmers Weekly, read it here

 

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