Compulsory purchase – a threat and an opportunity for housebuilders

We take a look at the noises being made by the Government and the opposition in respect of compulsory purchase powers and explains why these may be an opportunity and not just a threat to housebuilders.

Threat

Sir Oliver Letwin is currently chairing an inquiry in to landbanking, which seems destined to find that ‘use it or lose it’ powers should be threatened against developers.  Indeed, Birmingham City Council and other local authorities have already passed resolutions to implement compulsory purchase powers in this manner, although to date there have not been any actual attempts to do so.

At the same time, the Communities and Local Government Committee is holding an inquiry in to land value capture, which includes a proposal to ignore hope value when land is compulsorily purchased. 

Perhaps most alarmingly of all, Labour’s Shadow Housing Minister, John Healey MP, has recently floated the idea of compulsorily acquiring land from developers at a price that ignores the existence of any planning consent that may have been granted, where the development has not yet been built out.

Different elements of this triple threat to housebuilders are being supported by a range of lobbyists, including various sections of the media, and, to a greater or lesser extent, organisations such as Shelter and the RTPI. 

It is important that housebuilders engage in the debate, to ensure that myths are busted by providing clear evidence that will help to avoid conflation between the reality (i.e. that developers foster a pipeline of consents that require the discharge of pre-development conditions and which come forward to meet market demand) and the fiction (i.e. developers simply sit on land with no intention of developing it).

The HBF is already providing a vocal defence of the industry in the face of what seems to be an anti-developer agenda.  At the same time our team at Gateley Hamer is working proactively through the RICS and the Compulsory Purchase Association to point out to both Government and Labour the flaws in many of their respective proposals, and the misconceptions on which they are based.  Not least of those flaws is the possibility that using compulsory purchase to acquire land below market value is potentially unlawful, as it may contravene Article 1 of the first protocol of the European Convention on Human Rights. 

Opportunity

On the flip side of the coin, compulsory purchase is a tool which can be used very effectively to facilitate development through unlocking sites that would otherwise be unlikely to come forward for years, if ever.  In that regard it is massively under-used by developers.

Our team is advising a number of developers through the process of approaching Local Authorities to request that they promote a compulsory purchase order (CPO) to enable developments to come forward.  This is necessary because, in almost all cases, it is only the Local Authority that has powers to promote a CPO.  Fortunately, we’re increasingly finding they are prepared to do so on behalf of developers, subject to the developer underwriting the associated costs and demonstrating why and how the key tests for compulsory purchase will be met.  Those tests are:

1. that there is a compelling case in the public interest whereby the public benefits of the underlying development will outweigh the private loss suffered by affected landowners (this test includes a human rights aspect too, but one which is generally capable of being overcome);
2. that there is a realistic prospect that the project will be delivered in a reasonable timeframe if the CPO is confirmed;
3. that there are no planning impediments to delivery of the underlying scheme; and
4. that reasonable efforts have been made to acquire the interests by agreement.

The key to the first test is the ability to demonstrate that the underlying development is likely to deliver social, economic or environmental benefits for the wider public.  Very often the provision of housing in an area where there is an under-supply will go a long way to ticking this box, but it may also be necessary to demonstrate that the provision of schools or commercial (i.e. job-creating) elements of the scheme will deliver social benefits, and/or improved green spaces will deliver environmental benefits.

The second test is essentially asking a) are the financial resources in place to deliver the scheme, and b) does the developer have a track record.  In most cases that should be easy to demonstrate.

The third test can most easily be passed in cases where full planning consent has been granted, but that is not always necessary and an outline consent will generally suffice.  The key requirement is to demonstrate that the underlying development is not in conflict with existing planning policy.

The final test is another which is relatively straightforward.  Compulsory purchase should generally be a last resort, but that doesn’t mean that attempts need to have been made to acquire third party interests at any cost.  Rather, the requirement is to demonstrate that reasonable efforts have been made and reasonable offers have been put to third party landowners. 

By reasonable offers, read offers that reflect the level of compensation that the landowner is likely to be entitled to if compulsory purchase powers were exercised.  In most cases that level of compensation will be far less than what a developer might pay for an option in the absence of compulsory purchase powers being available.

In our experience, the price paid by a developer benefiting from compulsory purchase powers (and sometimes even just the threat of them) will generally be less than 10% of the price that might be paid for similar land in the absence of compulsory purchase powers.

This is because under the compulsory purchase compensation code market value is in most cases based on existing use value, and will only reflect a degree of hope value.  The key question is what, in the “no-scheme” world, would the land be worth? 

In most cases, where there are multiple interests to be assembled in order for a scheme to be delivered, and planning policy only supports comprehensive development, it will be very difficult for a landowner to demonstrate that their land would have been worth anything over and above existing use value in the absence of the developer’s scheme.  And the benefit of the compensation code is that the developer’s scheme is to be ignored for the purpose of assessing market value.

One drawback of the compulsory purchase process is that it will generally take around two years from initial approach to the local authority, to obtaining vacant possession of land.  However, that is still much quicker than the typical gestation time where a site has to be assembled purely through agreement. 

Another oft-cited drawback is the potential for adverse PR.  But in a world where developers are being accused of sitting on sites and failing to develop, what greater means of dispelling the landbanking myth than to use compulsory purchase in a proactive manner to bring schemes forward?

Our team is available to advise developers through all stages of the compulsory purchase process, and we’re happy to present to your team about how the process works and how to avoid common pitfalls.