Jonathan Stott, Managing Director of Gateley Hamer and current Chairman of the Compulsory Purchase Association, looks at the Government’s response to proposals for a radical shake-up of planning rules aimed at capturing a higher proportion of land value uplift.
The government has largely rejected plans for a radical shake-up of planning rules to enable central and local government to capture a higher proportion of the land value uplift that is created by the granting of planning consent.
The plans were contained in a report published in September 2018 by the Ministry of Housing, Communities and Local Government’s (MHCLG) Land Value Capture Select Committee, which called for wide-ranging reforms to allow local authorities to buy land at a “fairer price” as part of a strategy to solve the housing crisis.
The Select Committee argued that increases in land value were largely created by the state through the granting of planning permission or new infrastructure projects and as such the public purse should capture a greater slice of any uplift.
The Government responded to the Select Committee’s report on 29th November. Their full response is here and this article provides an overview of the key points.
The case for greater value capture
In response to the suggestion that landowners currently retain around 50% of the increase in land value arising from the granting of planning permission:
MHCLG land value estimates are not reflective of the price paid for land and a comparison between residential and agricultural land value estimates will not give an indication of the amount returned to the landowner. The price at which a plot of undeveloped land is sold for may be significantly higher than the existing agricultural use value, this is because the market price will also reflect the potential for the land to be developed at any given point in time.
The Government agrees that there is scope for central and local Government to claim a greater proportion of land value increases. The Government’s priority is delivery, in line with the Housing Minister’s commitments to provide more higher quality housing more quickly. Changes to land value capture systems can have profound impacts on the land market in the short term, even where they are sensible for the longer term. Accordingly, the Government’s priority is to evolve the existing system of developer contributions to make them more transparent, efficient and accountable.
Local Planning Authority capability and capacity
In response to the statement that ‘there is clearly an issue around capability in local authority planning departments and it is in the public’s interest that this improves’ and the recommendation that ‘the Government should work with the Local Government Association to provide additional resources, training and advice to local planning authorities’:
The Government recognises the importance of having the right level of resourcing and skills in local planning authorities and the challenges they face. We are committed to ensuring that local planning authorities have the capacity and capability to deliver and improve the speed and quality of plan making and decision making. That is why in January 2018 Parliament approved regulations that provided a 20 per cent increase in planning fees, with the commitment from local planning authorities that the increased revenue would be reinvested into resourcing their planning departments. Based on the level of activity at the time, the uplift in planning fees was estimated to generate over £75 million of additional fee income annually for local authorities, which can be used for additional training or the recruitment of specialist planners.
Local Infrastructure Tariffs
In relation to the proposal to introduce a Local Infrastructure Tariff ‘with a minimum level of developer contributions that cannot be negotiated away through the viability process, while ensuring local market conditions are recognised’, the Government’s response is:
The Government notes that there is no precise model for a Local Infrastructure Tariff (LIT) at present, in particular, there is no proposed methodology for how the LIT would be set and the rate at which this would be charged. Without this, it is not possible to make an assessment of the extent to which different developments in different places would pay more or less (and therefore whether the viability of development would be affected, and whether individual authorities would raise more or less revenue). Accordingly, the Government’s immediate priority is to evolve the existing system of developer contributions as set by local authorities.
Changes to CIL
The Select Committee report suggested that for CIL to become an effective mechanism [for capturing value] it ‘needs considerable reform’. Their report stated ‘CIL is far too complex and the extensive range of exceptions need to be removed. Importantly, there has to be greater certainty that the infrastructure associated with development is actually delivered at the appropriate time, sometimes in advance of development commencing’. In response, the Government has said:
‘The Government accepts that further reform to the Community Infrastructure Levy is needed. This is why we are bringing forward reforms to developer contributions that will reduce complexity and increase certainty for local authorities, developers and communities. As we have set out above, the key objectives of these reforms are to make the system of developer contributions more transparent and accountable. The proposed reforms will provide continuity and certainty for developers in the short term. In the longer term, the Government will continue to explore options for going further’.
Use of CPO powers to capture value
In response to the suggestion that ‘local authorities should consider using their existing CPO powers to enforce local plan policies’, the Government’s response explains that ‘local authorities already have extensive powers to acquire land compulsorily or by agreement, including for planning and housing purposes…..The revised National Planning Policy Framework encourages local authorities to take a proactive approach to land assembly, supported where necessary by the use of compulsory purchase powers, where doing so would help to secure better development outcomes.
Changing the LCA 1961 to disapply hope value in the assessment of compensation
In response to the calls for changes to the Land Compensation Act 1961 to achieve greater land value capture by limiting compensation to existing use value, the Government’s response states:
‘Through the Housing and Planning Act 2016 and Neighbourhood Planning Act 2017, the Government has recently taken forward wide-ranging reforms to make the compulsory purchase process clearer, fairer and faster for all. These reforms include extensive changes to the Land Compensation Act 1961. We are keen to let these recent reforms bed in but will continue to monitor their practical application and remain open to considering practical improvements to the framework’.
The response goes on to provide a useful overview of the basis for assessing compensation:
‘Compulsory purchase compensation is currently based on the overriding principle of ‘equivalence’. This is the principle that people whose interests are acquired compulsorily, or under the threat of compulsion, should be put – at least in monetary terms – in the same position as if the land had not been taken, being entitled to compensation which is neither less nor more than the value of their loss. Reflecting this, they are entitled to the market value of the land to be acquired, disregarding any increase or decrease in value caused by the ‘scheme’ (e.g. regeneration project, new settlement, trunk road etc) underlying the acquiring authority’s Compulsory Purchase Order – or the prospect of that scheme. This is known as the ‘no scheme principle’, which was codified through changes in the Neighbourhood Planning Act 2017 which came into force in September 2017.
The basic premise is that compensation should reflect what the land or property would be worth on the open market if the scheme to which the Compulsory Purchase Order relates did not exist (i.e. in the ‘no-scheme world’)’.
Specifically, in relation to the proposal to disapply hope value within the assessment of market value compensation, the Government’s response states:
‘Compensation includes ‘hope value’ (i.e. value based on the land’s development potential) only insofar as it can be demonstrated to exist in that no-scheme world. The extent of this hope value will reflect the prospects of obtaining planning permission for an alternative development in the absence of the scheme, taking into account the risks, uncertainties and costs associated with implementing such a development. This includes the costs of providing the affordable housing, infrastructure and supporting facilities required to make the development acceptable in planning terms, as well as any Community Infrastructure Levy liability’.
In reality, and as has been repeatedly stated by me and many others who are involved in the field of compulsory purchase, development value or even hope value is only rarely paid, because in most cases claimants cannot demonstrate that it genuinely exists in the no scheme world. However, if it does exist, it is only fair and reasonable that it is paid. The Government’s response provides further clarification about this in response to the Committee’s recommendation that NTDC’s should have the ability to acquire land at existing use value:
‘If land is acquired by a new town development corporation, compensation would be assessed in accordance with the no-scheme principle. In practice, the value of compensation would depend on the location, character and planning status of the specific land being acquired. If there are limited prospects of the relevant land being developed in the absence of the designated new town, the market value is likely to be the same as or close to existing use value. As noted in paragraph 31, even where planning permission for an alternative development has been granted or can be assumed, the level of compensation would reflect the ability of a claimant to implement that development, and the costs of providing the necessary infrastructure.
On this particular point, it is a relief and also reassuring to know that Government has listened to those of us who work in this arena, and has ignored the lobbyists who – based on major misconceptions about how the process works – have been calling for changes to the assessment of compensation where land is compulsorily purchased.
Making the compulsory purchase process clearer
In relation to the fact that compulsory purchase is a complex field and in line with the Government’s commitment to ensure the process becomes ‘clearer, fairer and faster’, the report states:
‘The Government recognises that compulsory purchase is a complex area and there is limited awareness of how compensation is assessed in practice. [Is this a thinly veiled criticism of those lobbyists who, based on limited knowledge, have been calling for reform, one wonders?!] In 2004 the Government published a series of booklets that sought to provide a plain English guide to compulsory purchase compensation. Given that significant reforms have been implemented in the intervening period, we propose to review and update these guides’.
This is very welcome news and will help both acquiring authorities and displaced parties immensely.
Compensation to reflect the cost of acquiring an equivalent property
In relation to the Committee’s proposal that compensation should be paid to reflect the cost incurred by a displaced property owner to acquire an equivalent replacement property, rather than the value of the property that is acquired (which, by the way, is a proposal that runs totally in the face of land value capture!) the report is non-committal:
‘The Government shares the Committee’s concerns and accepts the need to explore this matter further. As noted in paragraph 30, compulsory purchase compensation is based on financial equivalence – with three principal heads of claim: the market value of the interest acquired, disturbance and loss payments.
We are aware that in certain circumstances, the value of compensation paid may not enable claimants to purchase a replacement property in the immediate area. In practice, acquiring authorities can address these situations through bespoke support packages for affected residents, including shared equity or shared ownership arrangements. We will give consideration to whether our compulsory purchase guidance could be more explicit about the Government’s expectations as to resident protection in a compulsory purchase context’.
A register of CPO decisions
Finally, the response includes a helpful commitment, and something that the Compulsory Purchase Association has long called for, to ensure CPO applications and decisions are more easily accessible:
‘To increase transparency around how Compulsory Purchase Order decisions are taken, and how long it takes to reach those decisions, MHCLG will prepare an online register of Compulsory Purchase Order cases. Such a register will increase the amount of publicly accessible information about current and past cases, and support monitoring of the timescales and targets introduced on 6 April 2018’.
Overall, the Government’s response is very measured. It’s pleasing to see there are no knee-jerk reactions and the Government is not bowing to pressure from lobbyists. The slight concern, however, is that this is just the appetiser, and the response to Sir Oliver Letwin’s report, due in February next year, could be more telling. Letwin has put forward some rather radical proposals, and Government is under pressure to give some ground to demonstrate that it is willing to listen to proposals to solve the housing crisis.