3Legislative reforms
83.As outlined in the previous chapter, we have heard significant evidence for how existing taxes and charges could be reformed better to capture uplifts in land value. However, as noted by several witnesses, it is clear that these mechanisms are insufficient on their own to deliver the affordable housing and infrastructure that is needed.150 In this chapter, we consider changes to existing legislation that could make a significant difference to the ability of local and central government to capture large uplifts in land value.
Compulsory Purchase Orders
84.Compulsory purchase is not in itself a form of land value capture, but it is an important tool for local authorities to assemble land to deliver development, regeneration and infrastructure projects in the public interest.151 Indeed, the Royal Town Planning Institute told us that CPO powers were “crucial to the development of New Towns”.152
85.Several changes were made to the CPO regime through the Housing and Planning Act 2016 and the Neighbourhood Planning Act 2017, which the Government anticipated would make “the compulsory purchase process clearer, fairer and faster for all”.153 Changes included the confirmation timetable for CPOs, the right to request an advance payment of CPO compensation, and clarification of the ‘no-scheme principle’.154 John Wacher told us that the GLA were supportive of some of the changes made to the CPO process, in particular those relating to the ‘no-scheme’ principle, which could give greater scope to local authorities to capture more of the uplift in land value associated with public sector intervention.155 However, the LGA called for further reform, and made several recommendations in their written evidence to this inquiry.156
86.Councillor Tett told us that many Councils were wary of CPO processes, as they were seen as being “costly, time-consuming and nearly always controversial”.157 Daryl Phillips, representing the District Councils Network, agreed, telling us that compulsory purchase was “a powerful tool”, but the process was “an administrative nightmare … and the risk with it is substantial”.158 He particularly noted the challenge arising from the requirement for CPO submissions to be confirmed by the Secretary of State, and highlighted an example from Hart District Council, which had been waiting four years for the Secretary of State’s permission to issue a CPO on a derelict public house. The LGA recommended that all such decisions should be delegated to the acquiring authority, with the Secretary of State simply retaining the ability to use their recovery powers in exceptional circumstances.159
87.Other witnesses, however, expressed their view that CPO processes should be complex. Christopher Price, from the CLA, told us they were “quite rightly, expensive and time consuming”:
Making a compulsory purchase order is a very drastic step to take. It is effectively the state saying that it knows better what to do with your land than you do. I am sure you will have had constituents who from time to time have come to you saying, “My land is being compulsorily purchased,” [ … ] They will have been traumatised by it. [ … ] It is not a great thing to do [ … ] It should not be that easy to go and take people’s land off them.160
88.CPO powers can be important in enabling the development and provision of necessary infrastructure on large sites, particularly where ownership is fragmented. This could facilitate completely new developments, extensions to existing communities, or the build out of large schemes within urban areas. The Government should build on its reforms to the CPO process and consider ways in which the process can be further simplified, to make it faster and less expensive for local authorities, whilst not losing safeguards for those affected. We heard that the requirement for the Secretary of State to confirm CPO submissions causes unnecessary delays. Such decisions should be made locally, including by local authority-led New Town Development Corporations.
89.Compensation arising from compulsory purchase is currently offered on the basis of financial equivalency for what has been lost. Barry Denyer-Green, a barrister from Falcon Chambers, highlighted the inherent unfairness in this system in circumstances where the financial compensation offered is insufficient to purchase an equivalent property elsewhere.161 Mr Denyer-Green highlighted the example of a derelict former-mining village near Newcastle, where houses were compulsorily purchased by the local authority at such a low value that it was not possible to find a new home to replace that which had been lost.162 The National Farmers Union highlighted a similar concern, arguing that a farmer may have land compulsorily purchased which then renders the farming business unviable because of decreased land area size.163 Mr Denyer-Green called for a new arrangement—as operated in some other countries—in which compensation levels are determined by how much it would cost to relocate an affected person to an equivalent property, not the value of the land acquired.164
90.It is concerning that, in many low-value areas, the financial compensation offered by local authorities or central government for property is not sufficient to purchase an equivalent replacement elsewhere. The Government needs to assess how best to address this inherent unfairness in the CPO system and explore whether, in some circumstances, it may be more appropriate to provide an equivalent replacement for what has been acquired.
Hope Value and the Land Compensation Act 1961
91.In June 2018, the Government announced that local authorities would be able to seek the Government’s approval to launch New Town Development Corporations, which will be responsible for delivering the next generation of New Towns and Garden Cities.165 However, it was highlighted by several witnesses that, despite talk of a new generation of New Towns and Garden Cities, these modern Development Corporations would not have the same powers as their predecessors.166 The first generations of New Towns owed their success to the ability of Development Corporations to acquire land in places where there was little or no expected alternative use, so the prices offered were often equivalent to market value as well as being at, or near to, existing use value. Uplifts in land value were then captured to fund the infrastructure needed for the new developments. This was enabled through the Town and Country Planning Act 1947, which nationalised development value. Development Corporations were able to acquire land in this way until the passage of the Town and Country Planning Act 1959 and the Land Compensation Act 1961, which introduced new compensation arrangements for landowners.167 These arrangements entitled landowners to build the prospect that planning permission may be granted on the land in the future into their valuation. This legislative change therefore required local authorities and Development Corporations to pay more to acquire land for development. A very significant part of the evidence we received focused on calls for reform of the Land Compensation Act 1961 to remove the right of landowners to this ‘hope value’.
What is ‘hope value’?
92.The Land Compensation Act 1961 requires the payment of compensation to landowners taken to be the amount which the land, if sold in the open market by a willing seller, might be expected to realise with this amount to include any justifiable prospect of planning permission being granted on or after date of acquisition for development on the relevant site or on other land. It is this building in of the prospect of some future planning permission that is sometimes referred to as ‘hope value’. Hope value is not restricted to a single planning permission, and the calculation is determined on what can be justified on a case-by-case basis, based on evidence presented by landowners and developers. The calculation of hope value is not a straightforward process, as highlighted by Paul Brocklehurst of the Land Promoters and Developers Federation:
I suspect there are many factors, including timing. At what point do you determine the level of hope value? Is it the hope value before any mention of the land coming forward in a planning process or is it at the point just before adoption of a local plan or at the point of an adoption? The hope value changes during that cycle, but I suspect there are plenty of people who have come up with a formula for trying to calculate it.168
93.Hugh Ellis told us that ‘hope value’ was “a fairly extraordinary concept … a process of being in a fantasy land”, and changes made through the Act were “a brake on the effectiveness of the New Towns”.169 Others, however, argued that hope value was a perfectly well-established concept, with Christopher Price, from the CLA, expressing the view that, “Hope value is part of the value of any asset”.170
Proposals for reform
94.Given that we did not make specific reference to reform of the Land Compensation Act 1961 in our call for written evidence for this inquiry, we were struck by the number of submissions that highlighted this issue as being central to any new regime of land value capture. The Chartered Institute of Housing told us that, for New Towns to be successful, local authorities needed the power to acquire land at closer to existing use value, rather than anticipated value from future development.171 The Royal Town Planning Institute similarly called for changes to the Land Compensation Act 1961, to allow local authorities to assemble sites more easily and capture uplifts in land value for the public.172 We also heard support for reform from local authorities themselves, with the LGA calling for reform of the Act to give:
[ … ] Councils the ability to acquire land for garden cities, towns and new villages and other large-scale land assembly at closer to existing use value to capture more uplift in land value for infrastructure and community benefits.173
95.Shelter told us that the Land Compensation Act 1961 was “fundamentally an outdated piece of legislation” which had the effect of “distorting land prices [and] ensured that development simply cannot meet communities’ needs in most circumstances”.174 The Centre for Progressive Capitalism—which said the Act was “the reason for our dysfunctional land market”—called for two specific amendments:
[ … ] to amend section 14 of the 1961 Act so that: No account is taken of any prospective planning permission in land designated by local authorities or city regions for infrastructure including housing. In addition, the Centre proposes to amend section 17 of the Act so that: Certificates of appropriate alternative development would cease to apply in those areas designated by local authorities or city regions for development.175
96.There have been growing calls for reform beyond our inquiry. We note the open letter signed by 16 organisations—including Shelter, Civitas, the National Landlords Association and the National Housing Federation—and published in August 2018, which called for the greater sharing of land value with communities, arguing:
Most importantly, they should reform the 1961 Land Compensation Act to clarify that local authorities should be able to compulsorily purchase land at fair market value that does not include prospective planning permission, rather than speculative “hope” value.176
The IPPR also called for reform of the Land Compensation Act 1961, arguing in a report published in August 2018, that the Government should reform compulsory purchase laws to allow local authorities to acquire land “at a fair value”:
To achieve this the 1961 Land Compensation Act should be amended to remove speculative ‘hope’ value based on prospective future planning permissions. The landowner could still expect to receive a return on their investment, which provides them with an incentive to bring forward their land.177
97.Shelter argued that re-establishing the right of the State to purchase land compulsorily without an element of hope value did not necessarily mean that this power should be used routinely. Instead it should serve as “a credible threat … as a last resort, as a backstop” so that landowners are incentivised to sell their land at a fairer value, as opposed to “holding out for the wildest possible value based on the wildest possible calculation of what they could possibly get in future”.178 Similarly, the Chartered Institute of Housing expressed their view that these powers would “incentivise landowners to release land for development in advance of any application of the compulsory purchase”.179 This was supported by Daniel Bentley and Tom Aubrey, who told us they envisaged a system in which a fair market value would continue to be paid by the State, but one which took into consideration local policy constraints, such as for infrastructure and affordable housing. This proposal is similar to the model that the Committee heard about during its visit to Germany and the Netherlands, where land can be acquired by local municipalities at a market value that offsets the cost of providing the infrastructure and services associated with making a development viable, as determined by an independent expert panel.180
98.Others, such as the Town and Country Planning Association, told us that a new system of land value capture should be based around:
The greater use of development corporations to deliver large sites based on their ability to buy or compulsory purchase (CP) land without the application of speculative hope values. Instead landowner should be paid a flat rate of compensation based on current use values (CUV) plus a percentage of consented use value.181
Opposition to reform
99.We also heard significant opposition to reform of the Land Compensation Act 1961, particularly from landowners and developers. The CLA told us that any reform that would remove the right to the hope value of land would be “unfair” on the owners of the land:
It is being suggested that the Act be amended to remove the entitlement to hope value in the event of a compulsory acquisition. This is iniquitous. The effect would be to deprive the seller of an element of value that he would expect to receive if the sale was through the open market purely because the sale is compulsory. There is no justification for such as distinction.182
This was supported by Ian Fletcher, representing the British Property Federation, who said, “You cannot really argue that taking all the hope value is proportional”, and opposed reform of the Land Compensation Act 1961, arguing that it was contrary to “a British sense of fair play in terms of ensuring that landholders are properly compensated for their land”.183 The Minister of State for Housing told us there was “a different political environment” today, which made the land acquisition models of earlier generations of New Towns less acceptable in the modern context.184 He told us that, instead, the public sector should be required to pay landowners whatever might be achieved on the open market for their land:
All of this debate hinges on what market value means and, if an individual is selling land voluntarily and the market perceives that there is future benefit likely to accrue to that land, it will pay more than the current use cost. That seems to me a good basis on which to start a valuation. If you have a willing buyer and a willing seller, what price will they realistically settle on as it stands? For the Government to seek to take that land at a discount to that situation might create difficulties.185
Human Rights
100.Several opponents of reform argued that removing the right of landowners to hope value would be contrary to the European Convention on Human Rights and therefore require changes to the Human Rights Act 1998. For example, Barratt Developments expressed their view that, “Many commentators simply ignore both the Human Rights Act and the role of the plan led system when putting forward ideas on land value capture”.186 They quoted a Government factsheet on Compulsory Purchase, which said: “Compensating owners at less than market value is inherently unfair and is unlikely to be compatible with the European Convention on Human Rights”.187 The Minister of State for Housing also highlighted human rights concerns, telling us that, when many of the New Towns were built, “We were certainly in a different legal environment in terms of the human rights aspects of whether the Government can just steam in and say, “I am taking your land”.188 However, we note that the European Convention on Human Rights was adopted in in 1950 and entered into force in 1953, which clearly covered the period in which land was acquired for the construction of the New Towns.
101.Further Government guidance, published in February 2018, also requires local authorities to ensure they followed international human rights law when making compulsorily purchasing land:
An acquiring authority should be sure that the purposes for which the compulsory purchase order is made justify interfering with the human rights of those with an interest in the land affected. Particular consideration should be given to the provisions of Article 1 of the First Protocol to the European Convention on Human Rights and, in the case of a dwelling, Article 8 of the Convention.189
Article 8 of the European Convention on Human Rights (ECHR) requires respect for private and family life, and that there be “no interference by public authority with the exercise of this right except such as in accordance with the law and is necessary in a democratic society in the interests of [ … ] or the economic well-being of the country [ … ]”.190 Article 1 of the First Protocol of the ECHR concerns the protection of property, but is caveated by saying this “shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions.”191
102.Barry Denyer-Green, a barrister from Falcon Chambers, told us that if the State wished to acquire land excluding hope value, it needed to satisfy two tests to comply with the ECHR: a public interest test and a proportionality test.192 He explained that the public interest test could be served by paying less than financial equivalency, noting two examples where Parliament had enacted legislation in the past: the Leasehold Reform Act 1967, under which tenants of long-lease houses are able to expropriate the freehold without paying market value; and the Planning (Listed Buildings and Conservation Areas) Act 1990, which allows the Secretary of State to purchase a listed building compulsorily without regard to hope value, where the owner has allowed it to deteriorate.193 Mr Denyer-Green told us that, the greater the discrepancy between the full market value (including hope value) and the price the State is willing to pay, “the more you have to justify a good public interest reason why you are not paying financial equivalency”.194
103.Several proponents of reform to the Land Compensation Act 1961 expressed their view that the removal of hope value would not contravene the ECHR. The Town and Country Planning Association told us that, “As a matter of basic reasonableness it would seem hard for landowners to bring a successful Human Rights Act challenge to justify hope value if that value was not, and had never been, in possession of the landowner”.195 Daniel Bentley and Thomas Aubrey explained that their proposal was “not for the state to buy land at less than market value at all”, but to remove consideration of prospective planning permission from compensation payments, the effect being to reduce the market value of land, not pay less than the market value.196
104.Many witnesses pointed to the experience in Germany and the Netherlands to argue that other signatories to the ECHR were able to purchase land without attributing hope value. For example, Steve Akehurst from Shelter told us, “Demonstrably, other countries do this, and they are signatories to the same human rights law”, arguing that concerns around human rights were “a bit of a red herring, in our view”.197 Similarly, the Royal Town Planning Institute expressed their view that, “since CPO at close to existing use value is standard practice in several European countries, it is likely this objection is not insurmountable.”198
105.However, during the Committee’s visit to Freiburg, Germany, and Amsterdam, the Netherlands, we heard that local municipalities did not acquire land at existing use value or at full market value, but instead had the power to acquire land at a value that offset the cost of providing the infrastructure and services associated with making a development viable. The value paid to landowners was determined by an independent expert panel and became legally binding on both parties. This allowed the local municipalities to capture part of the increase in value of the land to provide the infrastructure and services required for the development. Dutch and German officials told us that these powers had been tested in their courts and were not deemed to violate the European Convention on Human Rights.
106.However, others argued that the law in Germany and the Netherlands did not exclude hope value, with Barry Denyer-Green telling us that, “This is not my understanding of the legislation, or rather the application of their legislation” and that, in practice, these countries purchased land “before value is attributed to hope”.199 Others cautioned against making international comparisons, generally. Liz Peace told us she would “always add a caution when doing international comparisons about taking any single tax or quasi-tax in isolation. You have to really look at its position in the whole taxation plan for that country”. Similarly, Paul Broklehurst of the LPDF argued that other European countries did not have the same cultural barriers associated with CPOs and hope value as in the UK:
[ … ] one comment I would make is that the Netherlands and Germany have a lesser cultural affiliation with the principle of private property ownership. A lot of residential properties are rented [ … ] Some of the reason why we might have our CPO laws is driven by our cultural affiliation with the right to private property ownership and to get adequately compensated if somebody is trying to take that off you.200
Alternative approaches to reducing compensation
107.We also heard arguments that reform of the Land Compensation Act 1961 was unnecessary, that local authorities already had sufficient powers to significantly reduce hope value. For example, Stephen Ashworth, a planning partner at Dentons, told us that an effective use of existing planning policies—a well-defined local plan with clear objectives and requirements, and a more strategic use of the CIL—could be an equally effective way to “drive down land value to such an extent that there is previous little hope value left”:
There should be a far more inventive use of CIL for those purposes. Look at what Wokingham has done, for example, in its urban extensions and new settlements. It has a CIL rate of £350 per square metre for properties, and that works; it drives down land prices [ … ] Impose a CIL around that area of new town, do it at £500 a square foot and you know what? The land value is going to be down pretty close to agricultural values. You have the capacity, as planning authority and charging authority, to change the market value, so why not do it locally instead of waiting for Parliament to change the compensation grid?201
108.Further, several witnesses argued that changes brought forward through the Neighbourhood Planning Act 2017 gave greater scope for local authorities to capture more of the uplift in land value through the ‘no scheme’ principle, which based compensation on the open market value of land acquired, in the absence of the scheme underlying the CPO.202 The Neighbourhood Planning Act 2017 says:
The no-scheme principle is the principle that—any increase in the value of land caused by the scheme for which the authority acquires the land, or by the prospect of that scheme, is to be disregarded [ … ]203
Indeed, the Minister of State for Housing told us that he did not think it would be necessary to reform the Land Compensation Act 1961 due to the ‘no-scheme’ principles within the Neighbourhood Planning Act 2017:
We have moved now to a situation where compensation is based on a pre-scheme. We are essentially trying to maintain a situation where you are compensated for your land on the same basis as if you have sold it voluntarily, but not necessarily with the benefit of the scheme that the local authority is sponsoring and putting in. That seems to me to be a sensible balance, so we will see where we get to on that [ … ]
Having the no-scheme rules come in gets us to that position. If the plan is to compulsorily acquire some land because the local authority is or the Government are putting in a junction on the motorway that makes it viable, it is acquired at a price that is pre that junction, so as if the junction did not exist. Those are the changes that went through at the end of last year.204
109.However, others argued that the ‘no-scheme’ principle did not reduce land values sufficiently. Shelter told us that this approach was “unlikely to dramatically impact land values or on the amount of value captured for betterment”, arguing that “market distortions inherent in the legal framework will continue to obscure the true market value of sites”.205 Professor Henneberry explained that the extent to which the ‘no-scheme’ principle would reduce value “very much depends on the circumstances”.206 For land in the middle of the countryside, which would not otherwise receive planning permission for housing, the entire development value could be attributed to the scheme. However, he highlighted that most work was undertaken within constrained urban areas—such as town extensions and redevelopments—where the hope value was much higher.
110.A well-defined local plan with clear objectives and requirements for which the developer must pay, would inherently be reflected in, and could create, lower market land values. There is already much that can be done to capture land value increases arising from planned development and infrastructure provision. This reinforces the urgent need for local planning authorities to agree up-to-date local plans.
111.In addition, we believe that the Land Compensation Act 1961 requires reform so that local authorities have the power to compulsorily purchase land at a fairer price. The present right of landowners to receive ‘hope value’—a value reflective of speculative future planning permissions—serves to distort land prices, encourage land speculation, and reduce revenues for affordable housing, infrastructure and local services. We do not believe that such an approach would be incompatible with human rights legislation, as there would be a clear public interest and proportionality case to make this change.
112.We believe that increases in the value of privately-owned land arising from public policy decisions should be shared with the local community. The compensation paid to landowners should, therefore, reflect the costs of providing the affordable housing, infrastructure and services that would make a development viable, as well as capturing a proportion of the profit the landowner will have made. The value paid to landowners should be determined by an independent expert panel and be binding on all parties. On land acquired by the public sector, this would allow local authorities to capture the remaining value to provide the infrastructure and services made necessary by development, as well as additional revenue for other local priorities. It would also serve to lower land prices traded within the private sector, ensuring that developers are able to meet their local plan obligations in full.
113.The first generation of New Towns owed much of their success to the ability of Development Corporations to acquire land at, or near to, existing use value and capture uplifts in land value from the infrastructure they developed and subsequent economic activity to reinvest in the local community. Reform of the Land Compensation Act 1961, alongside the enhanced CPO and land assembly powers that we recommend, will provide a powerful tool for local authorities to build a new generation of New Towns, as well as extensions to, or significant developments within, existing settlements. This is a model that has worked well in the past and would lead to a significant, and much-needed, catalyst for housebuilding.
154 CPO and compensation: key changes, Public Law Today, 20 April 2018
176 Sharing land value with communities: An open letter, Onward, 20 August 2018
177 The invisible land: The hidden force driving the UK’s unequal economy and broken housing market, IPPR, 28 August 2018, page 7
178 Q32 and Q36 (Steve Akehurst, Shelter) and Shelter (LVC092)
187 Factsheet: Compulsory Purchase (clauses 14–36), Department for Communities and Local Government, January 2017
189 Guidance on Compulsory purchase process and The Crichel Down Rules, Ministry of Housing, Communities and Local Government, February 2018
191 Protocol No. 1 to the Convention, European Convention on Human Rights
202 Ministry of Housing, Communities and Local Government (LVC084), para 21
203 Neighbourhood Planning Act 2017, Section 32
204 Q280 and Q285 (Kit Malthouse MP, Minister of State for Housing)
Published: 13 September 2018