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THE COST OF DELAY TO REINVESTMENT

AN ARTICLE by Peter Scrafton FIRRV, FCIArb, MRSA(Hon) Solicitor (Non-Practising)

April 2008.

It has been argued elsewhere in this series of articles on the need for reform to the compulsory acquisition compensation regime, that the underlying principle is supposed to be one of equivalent reinstatement as far as the claimant is concerned, with neither gain nor loss.  Those acting for an authority can usually control potential gains; but potential losses tend to be creatures of statute.  Following Horn v Sunderland Corporation (1941) 2 KB 26, it was held in Director of Buildings and Lands v Shan Fung Ironworks Limited (1995) 1 All E R 846 (per Lord Nicholls) that the principle holds good to this day.  There seems little justification for not applying this principle to the interests of those who invest in property but who are not in occupation of it at the time of acquisition.

 

However, in effect, the principle is frequently disapplied by the operation of s10A of the Land Compensation Act 1961 which currently only entitles non-occupying parties to recover certain reinvestment costs incurred: “... within the period of one year beginning with the date of entry ... [and in connection only with the acquisition of] ... an interest in other land in the United Kingdom”.  Many practitioners have tales to tell of cases where either the resolution of compensation is severely delayed or else the amount of a final offer is substantially less than the final compensation paid.  For example, there was a case not long ago where the compensation offered was approximately £15,000 and the settled compensation was £7,700,000!  It seems therefore that the operation of s10A militates against a fair compensatory outcome for the investor in many cases.

 

The CPA takes the view that the section (or its replacement) should operate in such a way that any time constraints imposed within it should allow for the reasonable prospect of achieving equivalence.  Reinvestment options should also be flexible and balanced.  Thus, there seems to be no reason to justify the retention of the limitation upon the reinvestment option to the geographical area of the United Kingdom:  after all, we are in Europe now, like it or not.  Further, there should be no suggestion that development value should not be taken into consideration.

 

With these points in mind, the Association suggests that a replacement to s10A might read as follows:

 

“Where, in consequence of any compulsory acquisition of land:

  (a)   The acquiring authority acquire an interest of a person who is not then in occupation of the land; and
(b)   That person incurs incidental charges or expenses in reinvesting any consideration received from the acquiring authority within the period beginning one year before the date of entry or disposal of the land (whichever is earlier) and one year after receipt of full compensation from the said authority (though excluding compensation payable by the acquiring authority pursuant to this s10A).  

The charges or expenses shall be taken into account in assessing his compensation.”

   

This reform requires primary legislation.  Its bedfellow, however, does not need quite such drastic treatment.

 

Bearing in mind the principle of equivalence, the payment of compensation following compulsory acquisition should not give rise to a capital gains tax liability; and so CPA proposes that s247 of the Taxation of Chargeable Gains Act 1992 be amended to that effect.

 

The rollover relief needs to be extended to the same timescale as that proposed in connection with s10A; and although the 1992 Act allows rollover relief to apply to the acquisition of property located anywhere (i.e. not limited to acquisition in the United Kingdom as is provided for in s10A) it should be widened to include potential for investment in assets other than real property interests.

 

The amendment, of s247 would require legislation; but the application of rollover relief is something which might perhaps (subject to discussion with the Treasury) be capable of being dealt with at least in the short term by extra statutory concession.

 

As ever, the thought and labour of the CPA are those of the Association.  While I was party to the preparation and approval of this and the other papers, the way in which the proposals are set out in this article are mine, and mine alone.

©J.P. Scrafton, 2008

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