UPPER TRIBUNAL (LANDS CHAMBER)

UT Neutral citation number: [2013] UKUT 16 (LC)

UTLC Case Number: ACQ/127/2011

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

 

COMPENSATION – compulsory purchase – empty house – valuation method – whether residual valuation or subsequent sale of subject property at auction preferred as basis of valuation – basic loss payment – compensation determined at £105,000

 

 

IN THE MATTER OF A NOTICE OF REFERENCE

 

 

BETWEEN ANTHONY KEITH ALLEN Claimant

 

and

 

LEICESTER CITY COUNCIL Acquiring  Authority

 

 

 

Re: 32 Broad Avenue

Leicester

LE5 4PR

 

 

 

Before: A J Trott FRICS

 

Sitting at: 43-45 Bedford Square, London WC1B 3AS

on 4 December 2012

 

 

 

The claimant did not appear and was not represented

Ms Philippa Jackson, instructed by Leicester City Council Legal Services, for the acquiring authority

The following cases are referred to in this decision:

Ridgeland Properties Ltd v Bristol City Council [2009] UKUT 102 (LC)

Bishopsgate Parking (No.2) Limited v The Welsh Ministers [2012] UKUT 22 (LC)

Melwood Units Pty Limited v Commissioners of Main Roads [1979] AC 426

Meghnagi v London Borough of Hackney [2008] RVR 122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECISION

Introduction

1.           This is a reference by Leicester City Council (the acquiring authority or the council) to determine the compensation payable upon the compulsory acquisition of the freehold interest in 32 Broad Avenue, Leicester LE5 4PR (the property or No.32).  The claimant is Mr Anthony Keith Allen who is the freeholder of the property.

2.           The property was acquired by a general vesting declaration made on 17 November 2005 under The Leicester City Council (32 Broad Avenue) Compulsory Purchase Order 2004.  The valuation date is 10 January 2006.

3.           The claimant did not appear at the hearing and was not represented.  Ms Philippa Jackson of counsel appeared for the acquiring authority and called Mrs Lesley Stewart MRICS, a valuer with Leicester City Council Property Services Department, as an expert witness.

4.           The hearing took place under the simplified procedure.

Facts

5.           The parties agreed the following facts.

6.           The property is located in the Crown Hills area of Leicester, approximately 2 miles east of the city centre.  The area is a good, well-established residential location close to the Leicester General Hospital complex and popular with NHS staff and their families.

7.           Broad Avenue is a major thoroughfare well served by bus routes.  The houses, which are all of similar age, are set back from the road by a wide grass verge and public footpath.  There are double yellow lines along both sides of the road.

8.           The property is a three bedroom, gable fronted, inner terrace house constructed of brick with a pitched slate roof and a small brick single-storey, flat roof rear extension.  It is located on the eastern side of Broad Avenue and is well set back from the road.  There is a front and a rear garden.  At the valuation date there was no parking area to the front of the property nor a drop kerb vehicular crossing or a driveway to accommodate a car. 

9.           On the ground floor the internal accommodation comprised a small entrance lobby, front and rear reception rooms and a very small kitchen.  On the first floor there were two double bedrooms, a small single bedroom and a small bathroom.  The total gross external area (GEA) of the property is approximately 860 sq ft.

10.        At the valuation date the property was in a neglected and semi-derelict condition and had been subject to vandalism.  All windows and exterior door openings had been boarded up.  A total of eleven window panes were missing or smashed.

11.        Externally the pitched roof had a number of  loose, slipped or missing slates.  The chimney required re-pointing.  The flat roof to the single-storey rear extension was nearing the end of its useful life.  The brickwork was in fair condition but some re-pointing was required to the rear elevation.  The front garden was unkempt while the rear garden was entirely overgrown.

12.        Internally the property was full of dumped rubbish, household items, old furniture, newspapers, magazines and old clothing.  An agreed photographic schedule showed the condition of the property at the valuation date.  The property required cleaning, extensive internal and external renovation and complete modernisation.

13.        The property was compulsorily acquired pursuant to sections 9 and 17 of the Housing Act 1985 in order to secure the repair and improvement of the property and its re-use as housing.  Because of the condition of the property it was not possible for the acquiring authority to make a detailed survey of its structural and decorative condition until all the rubbish and deposited items and effects had been removed.  On 17 January 2006 the acquiring authority wrote to the claimant giving him three options about clearing the property:

(a)         make his own arrangements to clear the premises and at his own cost;

(b)        allow the acquiring authority to clear the property at the claimant’s cost; or

(c)         for the acquiring authority to prepare a full inventory and for the claimant to decide what, if anything, to keep with all costs being met by the claimant.

On 17 March 2006 the claimant chose option (b) and the acquiring authority proceeded to clear the premises, thereby enabling a full inspection and survey of the property to take place.

14.        On 4 April 2006 the acquiring authority produced in respect of the property “a general schedule of works … considered necessary to meet the requirements of Leicester City Council.”  Those requirements were set out in the council’s “Private Sector Empty Homes Standard.”  The schedule of works contained a price summary.  This gave the total cost of works as £26,789 to which was added VAT at 17½%  (£4,688.10) and a “12% Agency Fee” (£3,777.27) giving a grand total of £35,254.37.

15.        On 6 June 2006 the acquiring authority wrote to the claimant and offered £91,000 for the freehold interest in the property plus interest and reasonable legal fees.  The offer was based upon an estimated value for the property in modernised condition of £135,000 less the estimated costs of refurbishment (£35,255), the costs of house clearance (£3,700) and an allowance of £5,045 for “refurbisher’s profit”.  (The actual cost of the house clearance was £4,200 but the acquiring authority absorbed the difference of £500.)  The claimant did not accept the offer, either then or subsequently.

16.        Having taken possession in January 2006 the acquiring authority sold the property by auction on 20 September 2006, subject to a condition that the purchaser would refurbish the property within 2 years to the council’s Private Sector Empty Homes Standard.  The price guide was £90,000 to £95,000 but the property was sold for £120,000 with completion taking place on 18 October 2006.

17.        The purchasers refurbished the property and on 13 November 2007 Mr Bott, one of the council’s Home Improvement Team Leaders, confirmed that the property satisfied the Empty Homes Standard.  The purchasers subsequently sold the property on 18 January 2008 for £133,000. 

18.        In its reference to the Lands Chamber the acquiring authority stated that the “approximate amount of the claim” was “£91,000 plus basic loss payments £6,825 totalling £97,825.”  They subsequently made an interlocutory application on 11 July 2012 to amend the notice of reference to exclude the basic loss payment.  Permission to amend the notice was granted on 25 July 2012.

The case for the claimant

19.        In his statement of case the claimant said that the acquiring authority had valued the property before it had been cleared of its contents and consequently the level of compensation offered:

“was based not on an empty property, but on a best estimation of a disordered property with impaired space.”

The guide price of £90,000 used at the auction took no account of the considerable development potential of the property.

20.        The claimant said that the acquiring authority had increased its offer of compensation from £90,000 to £91,000 after the property had been sold on.  By doing so they had “set a legal precedent” which meant that the compensation could be adjusted again to reflect the actual sale price of the property (£120,000).  The council were offering 75% of the true value of the property and he had consistently declined to accept the council’s offer on that basis.  The £90,000 was what the council expected the property to be worth; in the event it was sold for £120,000 and the claimant said that he was entitled to receive the actual sale figure as compensation.

21.        In his response to the council’s interlocutory application dated 11 July 2012 the claimant said that the council had:

“included the basic loss payment as part of the contractual offers since 2006 within legally binding contracts, including documentation sent to the Tribunal”.

He said that it would be wrong if the acquiring authority, having included the basic loss payment as part of the negotiations over six years, were now permitted to renege on that offer.

The case for the acquiring authority

22.        The acquiring authority said that the property had to be valued at the valuation date in January 2006 and did not accept that any adjustment should be made to reflect its subsequent sale at auction in September 2006.  Mrs Stewart relied upon five comparables, the details of which were agreed by the claimant.  All five were houses in Broad Avenue.  She explained that these comparables had first been used by Mr A J Klees BSc MRICS, the council’s then valuer, when valuing the property in May 2006.  Mr Klees’ valuation had formed the basis of the acquiring authority’s offer of £91,000 for the freehold interest in the property on 6 June 2006.  Mrs Stewart agreed with, and adopted, Mr Klees’ valuation.

23.        The five comparables were:

(i)         38 Broad Avenue: inner terrace; drop kerb vehicular access to paved car standing in front garden; gas central heating; Upvc double glazing; “summerhouse” off kitchen/diner. Asking price £144,950 (£182.50 psf GEA, excluding summerhouse);

(ii) 41 Broad Avenue: inner terrace; drop kerb vehicular access to paved car standing in front garden; lean-to conservatory; gas central heating; Upvc double glazing.  Asking price £140,000 (£187.79 psf GEA, excluding conservatory);

(iii)     70 Broad Avenue: end terrace; drop kerb vehicular access to car standing pad in grass verge; Upvc double glazing.  Sold in October 2005 for £135,000 (£165.64 psf GEA);

(iv)      72 Broad Avenue: end terrace; paved car standing area in front garden but no drop kerb vehicular access; gas central heating; Upvc double glazing; intruder alarm system.  Asking price £145,000 (£164.77 psf GEA).  Subsequently sold in July 2006 for £135,000 (£153.41 psf gross external area);

(v)        75 Broad Avenue; end terrace, drop kerb vehicular access to paved car standing in front garden; Upvc conservatory; gas central heating; Upvc double glazing.  Sold in March 2006 for £147,000 (£169.16 psf GEA).

Nos.38, 41, 72 and 75 all had two double bedrooms and a single bedroom.  Nos.38, 41 and 75 had a living room and a kitchen diner, while No.72 had two reception rooms and a separate kitchen.  There were no details of the accommodation at No.70.

24.        Mrs Stewart first valued the property as though it had been refurbished to a “basic decorated standard” assuming the dining room was converted to a kitchen/diner and the kitchen was converted to a utility room.  She also assumed that gas central heating and Upvc windows had been installed and fitted.  She does not appear to have assumed that an off street parking space would have been provided.  Mrs Stewart adopted a price of £157.11 psf which gave a capital value of £135,000 for the property as at the valuation date.  Mrs Stewart said that this figure reflected the lack of parking, the absence of a conservatory and the inner terrace location of the property.

25.        Mrs Stewart then deducted the estimated costs of refurbishment (£35,255), the costs of clearing out the interior of the property (£3,700) and a small allowance of £5,045 (approximately 3.75% of the open market value) for the purchaser’s profit.  The net amount of £91,000 represented the freehold vacant possession value of the property in its existing condition as at the valuation date.

26.        Mrs Stewart explained that the auctioneer had independently advertised the property with a guide price of £90,000 to £95,000 in September 2006.  She thought that the sale price of £120,000 might be explained by a number of factors:

(i)         A general increase in property prices between January 2006 and October 2006 (the date of completion of the sale);

(ii)       The purchaser may have been a special purchaser; and

(iii)     There may have been competition among developers for this type of project.

At the hearing Mrs Stewart produced a copy of the Government’s House Price Index for November 2006 which she said showed an increase in value of 8.5% between August and October 2006.  She also said that the council had sold two other residential properties at the auction in September 2006, both of which sold for above their guide price.  Mrs Stewart explained that the council often obtained more than the guide price for their properties and she attributed this to the sense of security that purchasers had when buying from a local authority.

27.        The purchaser had acquired the property for refurbishment.  Mrs Stewart said that the purchaser had told the council’s Empty Homes Officer that she had overpaid for the property which she sold again in January 2008 for £133,000.

28.        Ms Jackson submitted that there should be no basic loss payment.  The CPO was made on 6 October 2004 which pre-dated the introduction of such payments on 31 October 2004.  No reference to a basic loss payment had been made in the acquiring authority’s offer letter dated 6 June 2006 and Mr Klees’ valuation report said, in terms, that a basic loss payment was not payable.  The claimant had not claimed such a payment and the first, and only, time that it had been mentioned was in the acquiring authority’s reference to the Tribunal.  That had been a mistake.  It was not true, as suggested by the claimant, that the council had included the basic loss payment as part of its offers for the property since 2006.

Conclusions

29.        I consider firstly the valuation approach adopted by Mrs Stewart which is, in effect, a form of residual valuation that requires value and cost estimates to be produced.  The Tribunal’s reluctance to use this valuation method is well-known (see for instance Ridgeland Properties Ltd v Bristol City Council [2009] UKUT 102 (LC) at paragraph 293) and it should only be used as a last resort.  The inherent problems of the residual valuation method are illustrated by a consideration of the value and cost evidence that Mrs Stewart relies upon. 

30.        Only three of the five comparables used to value the notionally improved property were sales.  The other two, at 38 and 41 Broad Avenue, were both houses that were on the market at the date of Mr Klees’ report in May 2006 and their analysed value represents an asking price.  Mrs Stewart rejected the subsequent resale of No.32 at auction in September 2006 because it post-dated the valuation date.  But two of the actual sales, No.75 and, Mrs Stewart’s preferred comparable, No.72, took place after the valuation date, in March and July 2006 respectively.  The third comparable sale, 70 Broad Avenue, took place in October 2005 but was lacking in detail.

31.        In respect of costs Mrs Stewart relied upon a cost schedule prepared in April 2006 by Mr Richard Bott, a Home Improvement Team Leader, and which showed the estimated cost of bringing the property into compliance with the council’s Empty Homes Standard.  The total cost, before VAT, was £26,789.  There was no breakdown of this amount into its component parts.  Mrs Stewart explained that the costs were based upon the council’s schedule of rates that were charged by contractors from the council’s approved supplier list. 

32.        Mrs Stewart accepted that the item for “clear out and remove all rubbish” from the roof space that appeared in Mr Bott’s cost schedule was probably double-counted as part of the clearance costs of £3,700 that had been separately allowed for. 

33.        VAT was charged at the (then) standard rate of 17.5% on the building costs.  Mrs Stewart acknowledged that the works to No.32 were works of renovation to an empty house that would probably have qualified for reduced rate (5%) VAT in respect of building materials given that the property was an eligible dwelling. 

34.        Mrs Stewart explained that the agency fee of £3,777.27 was an internal charge levied by another party within the council.  She accepted that it was inappropriate to include it as a cost in the context of an open market valuation.

35.        There was also a notional allowance of some £5,000 for the purchaser’s risk and profit, but this sum was not derived from comparable evidence or by market testing. 

36.        Mrs Stewart’s residual valuation therefore contains errors and assumptions and, in my opinion, it does not produce a robust and reliable result.  I do not rely upon it.

37.        Mrs Stewart acknowledged in her expert report that the best comparable evidence would be the sale of another property in the same condition as No.32.  The subsequent disposal by auction of No.32 itself in September 2006 was such a sale.  By that time it had been cleared of rubbish and effects but was otherwise in much the same condition as it was in on the valuation date.  Mrs Stewart said the following about the auction sale:

“The property was later sold at auction but this did not take place until October 2006, nine months later, and whilst the price achieved in the auction was higher than the value attributed to the property by Mr Klee, this price was not achieved on or within a few months of the vesting day.

38.        In my opinion it is permissible to take account of the subsequent sale of No.32 by auction in September 2006 (with completion a month later).  In reaching this conclusion I have had regard to section 5A of the Land Compensation Act 1961, which was inserted by section 103 of the Planning and Compensation Act 2004.  It provides:

“(1) If the value of land is to be assessed in accordance with Rule (2) in section 5, the valuation must be made as at the relevant valuation date.

 (2) No adjustment is to be made to the valuation in respect of anything which happens after the valuation date.”

39.        This provision was recently considered by the Lands Chamber, the President and Mr N J Rose FRICS, in Bishopsgate Parking (No.2) Limited v The Welsh Ministers [2012] UKUT 22 (LC) at paragraphs 58-62.  The Tribunal said at [62]:

“The clear acceptance in Melwood of the potential relevance of post valuation date transactions has not in our judgment been rendered of no application in claims for compensation under the 1961 Act by the recent insertion of section 5A”.

The reference to Melwood was to the decision of the Judicial Committee of the Privy Council in Melwood Units Pty Limited v Commissioners of Main Roads [1979] AC 426.  That case concerned the compensation payable for the compulsory resumption of land in September 1965 for the construction of a road.  The resumed land formed part of a total of 37 acres which the claimant had assembled for development.  Following the resumption, in June 1966, the land that was left to the north of the land acquired, some 25 acres, was sold.  The Privy Council held that the subsequent sale, on the facts, was “a highly relevant piece of evidence for the evaluation of compensation in this case…” (Lord Russell of Killowen at 433G).

40.        In Bishopsgate the Tribunal continued at [63]:

“… evidence of a post valuation event may be relied on to establish an objective fact as at the valuation date.  Thus a comparable may provide evidence of what the hypothetical vendor and purchaser will in fact have agreed.  That an actual vendor and an actual purchaser have agreed a price on a property that is comparable with the reference property is undoubtedly capable of constituting evidence of what would have been agreed in the hypothetical transaction for the reference property itself.  It is this evidential function that was accepted in Melwood…  Of course the degree to which a comparable transaction will assist in determining the price of the reference property will depend on how similar the factors that are material to the valuation were at, respectively, the date of the transaction and the date of valuation and on whether adjustments can satisfactorily made for such differences as there were…”.

In the present reference it is the property itself that was subsequently sold and the factors material to the valuation are as similar as it is possible for them to be.  The only difference is in time (nine months between the valuation date and the subsequent sale; the same period as in Melwood) and the fact that No.32 had been cleared of its contents by the time of the auction in September 2006.  In my opinion adjustments can be made for those two factors.  In this respect the facts in the present case are similar to those in Meghnagi v London Borough of Hackney [2008] RVR 122 where a house that had been compulsorily acquired was subsequently sold by the acquiring authority by informal tender some eight months after the valuation date (with completion not taking place for a further nine months).  The Member, Mr N J Rose FRICS, adopted this subsequent sale as the basis to determine the compensation payable.

41.        The first adjustment to be made to the subsequent sale price of No.32 is for time.  Mrs Stewart adduced a copy of the House Price Index November 2006 produced by the Department of Communities and Local Government.  There are problems in using this index to adjust the auction sale price of No.32 to the valuation date.  The index is described as being published on “an experimental basis” having been developed in conjunction with the Office for National Statistics.  It is a mix-adjusted house price series and therefore there are no separate figures for terraced houses or for particular ages of property.  Figures are provided on a regional basis, the relevant region in this case being the East Midlands.  There is a warning footnote that:

“a month on month comparison of the Communities and Local Government Index and Price is not advised, as the series are not seasonally adjusted and comparisons over periods of less than a year will be affected by seasonal fluctuations”.

This was the only index adduced in evidence and although I think that it would have been preferable to have supported it by reference to other published house price indices, I consider that it does give a reasonable indication of the trend of house prices in the region over the relevant period.

42.        The actual house (East Midlands) price movement from January 2006 (171.0) to October 2006 (180.6) is 5.61%.  (Mrs Stewart referred to a figure of 8.5% but this was the figure for the UK as a whole for the three months to November 2006.)  Adjusting the purchase price of £120,000 as at October 2006 to the valuation date using this figure gives a value of £113,625. 

43.        In a claim for compensation for compulsory purchase it is usual for the cost of moving to form part of the claim for disturbance.  In this reference the articles and effects that remained on the property at the valuation date were, in my opinion, fairly described as rubbish and, as such, were a liability and not an asset.  Any purchaser of the property at the valuation date would have made an allowance for the cost of clearing the property.  At that time the presence of the rubbish in the house would have made it difficult for a prospective purchaser to assess accurately what work needed to be undertaken to put the house into good repair.  I consider that a purchaser would have been cautious when making an estimate for clearance costs and that he would also have required a small contingency to cover unforeseen costs.  I allow £8,625 in respect of these items.

44.        Apart from her reservation about the length of time between the valuation date and the auction sale Mrs Stewart said, in answer to questions from the Tribunal, that the October auction price should not be relied upon because properties sold by the council at auction realised inflated prices.  She said that purchasers paid more for the reassurance that the vendor was a local authority.  I do not accept that argument, the only evidence for which is that two other residential properties owned by the council sold at the same auction for above their guide price.  A potential purchaser of No.32 at the auction was buying a refurbishment opportunity, the cost of which was not affected by the identity of the vendor.  They were not purchasing a property in good repair with the assurance of a long history of council maintenance.  If anything ownership by the council may have been considered a disadvantage since the sale was made subject to a condition requiring its refurbishment to the council’s Empty Homes Standard within 2 years. 

45.        Mrs Stewart also said that the purchasers of No.32 had admitted to having overpaid at auction.  I attach little weight to this evidence which is hearsay but, in any event, it is not suggested that the figure of £120,000 was a maiden bid (which seems unlikely given the guide price of £90,000 to £95,000).  An auction is a recognised method of disposal to achieve open market value.  Bids are made openly.  It differs from an informal or formal tender where prospective purchasers make their offers in confidence and where there is scope for misjudging the market and offering considerably more than the other bidders.  In my opinion the auction in September 2006 established the then open market value of No.32.   

46.        In my opinion no basic loss payment is payable.  Such payments were introduced by section 106 of the Planning and Compensation Act 2004 as section 33A of the Land Compensation Act 1973.  Under section 106(2) of the 2004 Act, section 33A does not apply in relation to a pre-commencement acquisition of an interest in land.  The relevant definition of a pre-commencement acquisition in this reference is contained in section 106(3)(a):

“acquisition by means of a compulsory purchase order if the order is made or made in draft before the commencement of this section.”

Under the Planning and Compulsory Purchase Act 2004 (Commencement No.3) Order 2004, Part VIII of the 2004 Act, which includes section 106, came into force on 31 October 2004.  The compulsory purchase order in this reference was made on 6 October 2004 and the acquisition of No.32 is therefore a pre-commencement acquisition and so no basic loss is payable.

47.        The first and only time that a basic loss payment was mentioned was in the acquiring authority’s reference to the Tribunal.  It was not offered as part of the compensation in any correspondence.  The claimant says that a basic loss payment was always included as part of the negotiations over six years but there is no evidence of any active involvement of the claimant in such negotiations; indeed it appears that he did not even formally submit a notice of claim to the acquiring authority.

48.        I therefore determine the compensation payable for the compulsory acquisition of the freehold interest in the property in the sum of £105,000, being its value at October 2006 indexed to the valuation date (£113,625) less the estimated amount for clearing the property and a small contingency allowance (£8,625).

49.        The reference was heard under the simplified procedure where costs will only be awarded if there has been an unreasonable failure on the part of the claimant to accept an offer to settle or if either party has otherwise behaved unreasonably or the circumstances are in some other respect exceptional.  The parties have not identified any such unreasonable behaviour or exceptional circumstances and I make no award as to costs.

Dated 4 February 2013

 

A J Trott FRICS