Full steam ahead: HS2 compensation claims

The government’s confirmation in January 2012 of the proposed route of the high-speed railway (HS2) between London and Birmingham has had a huge effect on landowners ?and businesses.

Some properties and businesses will be directly affected, in that land and buildings involved may be on the route of the proposed line and will therefore be subject ultimately to compulsory purchase order (CPO) powers. The physical structure of the railway line and any construction zone will also impact on a wide range of properties.

Pressing on

The government intends to press ahead with a hybrid bill for the project in October 2013. This statutory procedure will give the government all the required statutory powers to implement the scheme. This will include compulsory purchase powers in relation to properties and businesses affected by the project.

The government intends to carry out a consultation on the ‘safeguarding’ procedure for the rail line this year, which will ultimately lead to the issue of a safeguarding direction, predicted for autumn 2012.

The effect of such a direction is to seek to protect the area of land required for the line in each local planning authority area and to prevent planning permissions which would conflict with the project.

The other important effect of the direction for landowners and businesses is that it triggers the statutory blight process.

The government is expected to carry out further consultation on the statutory blight process this year (promised for the spring), but there is no guarantee that it will enhance the current blight process. There have been some indications that the government recognises the concerns of many people of the general blight effect on many properties near to the line but which would be outside the normal statutory blight areas.

The government has indicated it will be considering providing an enhanced blight compensation scheme. However, further details have yet to emerge.

There are two main avenues of compensation that can be pursued by landowners and businesses in relation to the HS2 project.

1. The Exceptional Hardship Scheme (EHS)

The government introduced the EHS in 2010. The scheme is designed to cater for those who are in urgent need of selling their property and are unable to do so at a realistic level in the existing marketplace due to the effect of HS2. Locating a willing buyer at a realistic price has proved nigh on impossible for some landowners.

It is important to note that this scheme is entirely discretionary and has no statutory basis. There is therefore no right of appeal. However, applicants can resubmit applications if they have new and better supporting evidence.

Those administering the EHS scheme stress that people can submit their own applications and that they don’t need to engage a lawyer or surveyor to pursue the application on their behalf.

However, I have recently taken ?on a number of abortive EHS applications on behalf of clients whose initial applications have been rejected due to lack of preparation and detail ?covering the five constituent elements of ?such applications.

In practice, the applications need a more robust and detailed approach to documenting the claim to enhance the chance of success.

Government statistics indicate that, of approximately 360 EHS applications, only about 60 have been successful. Therefore the percentage success rate ?is low.

The main elements of the application relate to:

• qualifying interest;

• location of the property;

• efforts to sell;

• no previous knowledge;

• exceptional hardship.

Certain elements of this scheme have required greater input than first envisaged. Dealing with EHS applications, I have noted that the EHS administrators appear to require a lot of detail regarding efforts to sell the property over a period of time by experienced estate agents.

Other aspects of this element of the claim indicate that it must be demonstrated that the price has been adjusted to reflect the current depressed housing market, ignoring the effect ?of HS2. Have there been any offers within 15 per cent of the ongoing asking price? Is the price sought a realistic one in the market?

One useful measure to adopt is for the applicant to have dropped the price by 15 per cent to try and generate offers. If this is unsuccessful, then, subject to other evidence, this may be sufficient.

It is also very useful to have an agent’s log of viewings, potential offers and comments from prospective buyers indicating their interest and the fact that they have been put off by the knowledge of the proximity of the HS2 line.

A report from the estate agent/valuer confirming their assessment of the difficulty in selling the property due to the proximity of HS2 is an important element. Also promoting the property for sale by two independent agents is seen as being helpful to the case.

Subjective test

The ‘exceptional hardship’ criteria of the claim is a very subjective aspect of the scheme. The EHS form indicates that the applicant needs to demonstrate a “pressing need to sell and suffering exceptional hardship”.

I acted for one couple who were having to relocate to Australia within a short timescale due to job commitments. The EHS application was initially rejected. However, on the submission of more detailed evidence the application was successful.

The main element of ‘exceptional hardship’ was the fact that the claimants were having the potential financial pressure of having to pay two large mortgages on properties in the UK and in Australia.

In contrast, another recent case involved a couple who had split up and were going through a divorce. The wife was suffering from depression and was on medication from her doctor. The couple needed to sell the matrimonial home to distribute monies as a result of a financial settlement. There was also the threat of bankruptcy in county court.

This application was rejected. Therefore there does appear to be some inconsistency as to what is and what is not ‘exceptional hardship’.

In cases that have been rejected, those parties may have to await the issue of a safeguarding direction later this year, which may entitle them to use the statutory blight procedure.

However, if they are outside the terms of that procedure, they will have to await some potential compensation for noise and disturbance later on in the project. Unfortunately, the property may be subject to ‘general blight’ and the landowner may be unable to sell for many years.

If an application is successful then the next stage is that of valuation. HS2 Limited has a list of preferred valuers in each locality. HS2 will choose a valuer and the owner will be able to choose another valuer from the list. Two independent reports are prepared.

If the valuations are more than ten per cent apart then a third valuer is commissioned. Experience shows that it is important for a valuer to be selected who knows the local market. One tip is to get the owners’ estate agent to give the valuer a guided tour. He can ensure the valuer is aware of the local market...

2. Statutory blight

The statutory blight process is likely to be triggered late in 2012 by the issue of a safeguarding direction by the government. The statutory blight process is set out in sections 149 to 171, and schedule 13 of the Town and Country Planning Act 1990.

A landowner can decide to serve a ‘blight notice’ on HS2 Limited when this process is triggered. The process is a form of reversed compulsory purchase, in that an owner, subject to certain criteria, can serve a notice on the acquiring authority requiring the purchase of the owners’ interest in the land.

Under the Act, the acquiring authority may accept the notice and acquire the land or they may object on certain specified grounds by serving a ‘counter notice’. If that occurs then the matter will end up before the Lands Tribunal.

However, the blight process may not be entirely appropriate for certain types of landowner and business.

There are only certain parties who are entitled to serve a blight notice. The main theme is that being in possession of such blighted land is an exceptional hardship to them. These are:

• owner-occupiers of any hereditament, of which the net annual value for rating purposes does not exceed a prescribed limit – currently at £34,800 pa (not including owners ?of small businesses;

• residential owner-occupiers of a private dwelling;

• owner-occupiers of agricultural units.

?It is clear from the above criteria that this process is aimed at, in the main, individual owner occupiers or owners of small businesses.

Larger businesses affected by the ?rail scheme will not be able to use the blight process and will have to await ?the specific implementation of compulsory purchase powers via the hybrid bill or enter into a voluntary agreement with HS2.

The owner must have the freehold or have an interest under a lease for a term not less than three years unexpired. In addition, that person must be in occupation for six months immediately before the notice, or a period of six months ending not more than 12 months before the blight notice.

The blight procedure indicates that the claimants must be able to produce evidence to demonstrate reasonable efforts to sell the property, the price being at a realistic level and that they would only be able to sell at a price substantially lower than would be expected in the absence of blight.

However, there are some defects in the blight process, and in reality it is no quick fix for a landowner or small business. Until the level of compensation is agreed or determined there is no mechanism by which the acquiring authority can be compelled to take possession or pay compensation.

In reality, until possession is taken ?by the acquiring authority, an owner cannot argue there is no unpaid compensation and there is no right to interest and advanced payments are not available. There is no real incentive on the acquiring authority to take possession of the land or even agree compensation until it is ready to take ?the land in question.

In terms of the timescale for this project there may be considerable delays built in to any claims being pursued under a blight notice. It may be many years yet before HS2 Limited needs to take possession of the land.

If blight is not applicable, or a party does not fulfil the requisite criteria, and it is likely that their property will be required as part of the rail scheme, the landowner will have to wait for further procedures under the hybrid bill.

Rather than contest any eventual compulsory purchase order under the bill, a landowner could consider entering into a voluntary agreement with HS2 Limited. There is some potential in these circumstances with this particular tactic gaining more financial compensation for a client’s land.

The acquiring authority may be keen to sign up landowners and businesses on a voluntary basis at a higher value than that obtainable in the market. This would reduce potential objections and challenges to the use of CPO powers and provide them with increased certainty as to eventual possession.

For those parties who await compulsory purchase they will need to pursue a compensation claim. They will need experienced advice from a valuer and a CPO lawyer. The process of valuing land or a business is not a science and a claimant and the acquiring authority will come at the exercise from different directions. The claimant wants the most he can achieve, while the acquiring authority wants to pay as little as possible.

Often agreement is reached somewhere in the middle of two valuations. It is beyond the scope of this article but concepts such as ‘equivalence’, ‘market value’, ‘severance and injurious affection’ and ‘disturbance’ are all relevant and need specialist advice.

The concept of ‘betterment’ is also important. A landowner may retain some land not required for the scheme. If the value of that land increases as a result of the scheme, then the increase in value will result in reduced compensation for the land taken.

Therefore at this time there is some practical sense in a landowner seeking to transfer ownership of the other land, for example, within a family or trust to offset any later betterment arguments.

Outside spec

Unfortunately there will be landowners and small businesses who sit outside the corridor of the HS2 scheme; those who will not be acquired, not be eligible for the Exceptional Hardship Scheme and not qualify for statutory blight.

They may suffer for a long period of time from ‘generalised blight’ unless the government comes up with an enhanced statutory blight scheme this year. Generalised blight would result in a lowering of the value of their property difficulties in selling, together with noise and disturbance from the construction of the scheme and disturbance from the operation of the rail route.

The last potential avenue for compensation for those landowners and businesses is that set out in section 10 of the Compulsory Purchase Act 1965 and section 1 of the Land Compensation Act 1973. The former provides for compensation for depreciation in the value of property as a result of the execution of the works and scheme, and the latter provides for compensation to cover depreciation due to physical factors arising from the use/operation of the scheme, such as noise, dust, smells and vibration.

However, in terms of the latter, the rules indicate that a compensation claim cannot be submitted until one year after the scheme has been completed and is operational.

For those parties who have to rely on moderate compensation under the 1965 and 1973 Acts they may have to wait a considerable period of time. The current timetable indicates that HS2 will be operational by 2026 at the earliest!

Iain Johnston is a partner and ?head of the HS2 advisory service ?at SGH Martineau LLP