Compulsory Purchase and Compensation

Scenario

Youenstown District Council (‘YDC’) and Wright Developments Ltd (‘WDL’) are proposing to enter into a Joint Venture agreement whereby YDC will use its CPO powers to acquire an area of land for WDL to develop out as a mixed commercial/residential scheme with a 50% affordable housing content. The land is occupied currently by a variety of different business users.

As the JV agreement is drafted at present:

WDL will fund all costs associated with the construction of the commercial element; will have control over all matters relating to that part of the development and have control over who will be given a lease within the commercial element.

YDC will fund all costs associated with the construction of the residential element; will have control over all matters relating to that part of the development and have control over who occupies the residential element.

YDC will pay compensation in accordance with the statutory compensation code to all those whose interest in land is acquired. In return WDL will pay to YDC an agreed percentage of the developer’s profit realised by WDL.

Task

No-one working at present within the Council has any knowledge of either the CPO process or the principles relating to the assessment of statutory CPO compensation. You are instructed to advise the Council in respect of all compensation related matters and the CEO of YDC has now asked that you provide a briefing paper (of between 2,000 and 3,000 words) addressing the following:

1)         What resources are available to YDC to enable it to gather the information necessary to prepare a Property Cost Estimate in order to determine its likely liability in relation to the compensation payments that will have to be made?

2)         In respect of the following properties which are identified within the area to be compulsorily acquired, what are the principles to be applied in determining the compensation entitlement for each of the claimants:

An owner-occupied, freehold office property owned by Jane Youens Secretarial. The property was purchased by her in June 2007 for £400,000 with the help of an interest-only mortgage of the same amount; all of which is still outstanding. Due to the property recession of 2008/9, at the present time the property has an estimated open market value, ignoring any diminution in value caused by the blight effect of the CPO, of £350,000. It will cost Jane a total of £45,000 to move to another property.

A retail unit occupied by Jane Wright Fabrics. The property has a Rateable Value of £15,000 and has a Gross Internal Floor area of 100 sq m. JWF occupies under a lease within the Landlord and Tenant Act 1954. The lease commenced on 24 June 2012 and was granted for a term of 10 years at a rent of £12,500pa, with a rent review at the end of the 5th year which review has yet to be settled. As at 24 June 2017 the open market rental value, absent any threat of CPO, would have been £15,000pa and the current rental value is £16,000pa. A total of £75,000 was spent on the fitout of the shop when JWF took the lease in June 2012. It will cost JWF a total of £100,000 to move to another property which is available in an equivalent trading position.

An owner-occupied, freehold industrial unit occupied by AY Metal Fabrications. The owner and sole director is 61 years old and would like to retire. The property has a Rateable Value of £30,000 and has a Gross Internal Floor area of 1,100 sq m. The current open market value of the property as an industrial unit is £300,000 and the business operation of AYMF has been valued recently at £600,000. It will cost AYMH a total of £125,000 to move its business to another property which is available in an equivalent trading position. The site that AYMF occupies is ripe for redevelopment and as a redevelopment site is likely to be worth £500,000.

Whiter Smile Dental Surgery occupies a freehold property currently worth, ignoring the blight effect of the CPO, £500,000. It has a significant NHS/Private practice earning a net profit of £325,000 pa. Prior to the announcement of the proposed redevelopment the owner was considering selling his practice and he was advised by a specialist dental sales agent to expect it to sell for a multiplier of 6YP on the net profit. As he can no longer sell his practice, the owner intends to relocate into the new development and then look to sell his practice. It will cost him around £250,000 to relocate. He has consulted the NHS and they wish him to be located on the ground floor for ease of access for patients however WDL has indicated that it will only make first floor accommodation available as it wishes to maintain a constant ‘retail’ presence on the ground floor.

Youenstown Preparatory is a private school that was established on its current site in 1985. At the time it was established it occupied some 800 sq m of accommodation which enabled it to be certified as suitable for a complement of 140 pupils however due to current Department for Education standards, a replacement school of 800 sq m would cost £1.88m to build but would only receive certification for a complement of 120 pupils which reduction in numbers would represent a loss of net income per annum of £150,000. To receive certification for 140 pupils the school needs to be rebuilt to a size of 1,200 sq m at a cost of £2.75m.     

3)         Given the facts of the JV as outlined in the scenario above, and in relation to the properties identified in Q2 above, identify:

i) Any significant risks potentially facing YDC.

ii) How YDC might reduce its compensation liability.

ASSESSMENT CRITERIA

  1. Clarity of advice.
  2. Use of relevant statute and case law to support the advice given.
  3. Logical conclusions given the detail and values provided.

INFORMATIVE

You will not be penalised should your answer exceed the indicative word total of the brief provided that your answer is succinct.

You can adopt a ‘bullet point’ approach for your answers, should you wish to.

You should make and state assumptions as are necessary and appropriate to support your answers.