Compulsory Reading

The Town CPO Blog

Any hope for “Hope Value”?

As reported in the last entry of this blog, DLUHC is consulting on proposals to “allow acquiring authorities to request a direction from the Secretary of State that, for a specific scheme, payments in respect of hope value may be capped at existing use value or an amount above existing use value where it can be shown that the public interest in doing so would be justified.”

DLUHC’s stated aim is to “avoid lengthy disputes over the amount of hope value payable and uncertainty years into the development of a scheme as to how much compensation may be payable in respect of prospective planning permission, particularly where the viability of the scheme or the delivery of the benefits of the scheme depend on the value paid for the underlying land.”

But what is hope value? And is it true that there are lengthy disputes over its amount? No evidence is provided by DLUHC but if its assertion were correct one would expect to find a large number of Tribunal determinations relating to hope value but Juliet and I were only able to find a handful from the last 15 years or so which we summarise below.

What is hope value?

Before we do so, let’s get our terminology right.

The RICS guidance note on the valuation of development property defined hope value as “an element of market value in excess of the existing use value, reflecting the prospect of some more valuable future use”.

In the context of compulsory purchase, hope value can reflect either (a) the possibility of getting planning permission at the valuation date or (b) the prospect of getting permission in the future – that is the hope that planning policy will change to allow development on the subject land.

Under the current system, where there is “a reasonable expectation” of securing planning permission for a particular development (planning policies and material considerations relating to the scheme underlying the acquisition being disregarded of course), it is necessary to assume that the planning permission is actually in place. That general requirement has been in place since the Localism Act 2011 amended the Land Compensation Act 1961 in the light of the House of Lords decision in Spirerose but before then, it had been possible to secure an assumption of planning permission by getting a certificate of appropriate alternative development from the local planning authority or an inspector on appeal.

In most compensation claims, hope value is only assessed when there is a less than reasonable expectation of securing planning permission as at the valuation date or in the future.

Hope value and the ginger line

Early in my compulsory purchase career, I was fortunate enough to be instructed by TfL on a series of hope/development value claims in Shoreditch arising from compulsory purchase for the East London Line extension. In the mid-noughties, Shoreditch was not the high rent hipster paradise it is now but was already attracting artists and others in the creative industries.

Most of the cases I was involved in settled part way through proceedings in the Tribunal (notably a mammoth claim by Network Rail for loss of value of Bishopsgate Goods Yard) but two that did go through to a Tribunal hearing provide a helpful indication of how hope value will be determined if the Government’s proposals to limit or remove the assumption of permission where there is a reasonable expectation become law.

Firstly Spirerose itself. The Tribunal determined that there was a “strong likelihood that the claimant’s scheme as proposed would have gained consent if an application had been made at the valuation date” (para 133). The Tribunal converted that “strong likelihood” into an assumption of planning permission as a matter of law and it was that conversion which was overturned by the House of Lords. However, the Tribunal also made an assessment of hope value in case it was wrong to make the assumption as follows:

“To reach our assessment of the value of the site on the basis that there was no more than a hope of planning permission, we start by noting our conclusion on existing use value (£227,500) and the value that we find that the site would have had with the benefit of planning permission (£608,000). Its value if there was only a hope of planning permission would be somewhere between these two figures. Our conclusion is that there would have been a very good prospect indeed of getting planning permission for some form of redevelopment, a good chance of getting permission for the scheme that has been the subject of the residual valuation and little chance of achieving a planning permission for a scheme with a greater element of residential floorspace. We see no reason for thinking that a purchaser would not form a similar assessment both of the existing use and development values and the prospects of achieving planning permission. He would, however, be very conscious of the uncertainties – of not achieving planning permission for a valuable development, of the amount of floorspace and the mix and the potential for delay in achieving permission. Our conclusion is that a purchaser in these circumstances would have been prepared to pay substantially more than existing use value but much less than full development value, say £400,000.”

In other words, the “good” prospect of securing planning permission created hope value amounting to a 75% uplift on existing use value or about 45% of the uplift that an assumed planning permission would secure.

Next door to the Spirerose building was a property owned by a company called Urban Edge who also made a reference to the Tribunal for the determination of compensation. The parties and Tribunal agreed to a preliminary issue hearing to determine the prospect of securing planning permission for five different development options ranging from change of use from B2/B8 to B1 to various extensions of the building to include work/live units. While the Tribunal’s decision did not determine hope value (the claim was subsequently settled), it does show that the Tribunal is willing to state the likelihood of securing a planning permission as a preliminary step to assessing of hope value.

“The level of expectation that planning permission would be granted for each of the development options was as follows: Option 1: a very high level; Option 2: 50%-60%; Options 3, 4 and 5: a fairly low level.” (paragraph 69(iii)).

“I would add, for the purposes of considering hope value, that I see no reason why the market at the valuation date would have taken a different view about the prospects of planning permission from the assessment at (iii) above.” (paragraph 70).

In a preliminary issues determination in Thomas Newell Ltd v Lancaster City Council (2011) (in what would turn out to be just the start of 10 years of highly contentious litigation on a number of fronts), the Tribunal assessed the prospect of securing planning permission for development of a mill building for residential purposes to be 40%. When the Tribunal came on to determine compensation, it found that the hope value added nothing to the market value even in a rather frothy residential market:

“I have little doubt that, in the buoyant market which existed at the valuation date, investors would have taken a more optimistic approach to the future than they would in a more stable market. I also accept that a potential purchaser would probably not have prepared a detailed residual valuation based on residential development before deciding whether to pay an additional sum in the hope that such development might at some time be permitted. Nevertheless, since the odds were against residential planning permission being granted within the next five years, in my view an investor would not have reflected the possibility of such planning permission in his bid unless it would have resulted in a development value which was considerably higher than the value of the property as a commercial investment. I am not persuaded on the evidence that a prospective purchaser would have concluded that such substantial additional value would be unlocked if residential planning permission were granted.” (paragraph 124)

Similarly, the existence of hope value in land compulsorily purchased was counter-balanced by the betterment to retained land created by the highway scheme underlying the acquisition in Persimmon Homes v Secretary of State for Transport (2010) and no compensation was awarded.

Hope for a brighter future

The gentrification of East London

If the rise of the property market in Shoreditch was gradual and largely organic, a bit further to the east, the London Development Agency was embarking on a top-down transformation of Stratford. The Olympics CPO of 2008 gave rise to a lot of litigation but despite a rising market, very little of it concerned hope or development value.

One that did was Clearun Ltd v London Development Agency (2014) in which the parties agreed that there was a reasonable prospect of planning permission being granted 18 months after the valuation date for residential-led mixed use development. Clearun demonstrates that a high prospect of planning permission does not automatically translate into a windfall for a claimant. As the Tribunal pithily noted:

“Planning permission is one thing. When it is commercially viable to implement it is another.” (paragraph 146)

In a world where the Olympic scheme had been cancelled at the valuation date, improvements to Stratford (including, crucially, the Westfield development of Stratford City) would have been delayed by some years. Accordingly:

“a prospective purchaser of the reference land would have recognised that it had potential development value, but would have thought that it would probably be some seven years or so before that hope could be realised.” (paragraph 147).

After considering the risks of crystal ball gazing seven years in the future, the Tribunal concluded that the “top down” approach of the Claimant’s valuer (a residual valuation discounted to take account of deferred development) was not appropriate and preferred the “bottom up” approach of the LDA’s expert – adding a percentage uplift of 15% to the existing use value.

After the Localism Act 2011

It’s notable that the all of the cases discussed above were decided applying the law as it was before the Localism Act amendments were applied and which DLUHC is now seeking to (partially) reverse.

The only recent hope value cases we’ve been able to find all involve the Metropolitan Borough of Stockport (Hazel Grove (A6) to Manchester Airport A555 Classified Road) Compulsory Purchase Order 2013.

Budhathoki (and Others) v the Metropolitan Borough Council of Stockport [2022]

This claim involved four plots of land that were compulsorily purchased in early 2015 by the Council. In a no-scheme world the plots would have been either open pastureland or within a golf club. From the schedule to the CPO, the plots appear to have been divided into small parcels, configured in such a way as to imply that they might at some point in the future form individual building plots.

At the valuation date the plots were, in planning terms, allocated both as Green Belt and Open Countryside and according to the acquiring authority’s expert could not be developed in isolation. The Tribunal found that although none of the four plots of land had planning permission, and were located in areas where gaining planning permission would be “at the very least challenging”, 20% of value should be added to each plot to reflect hope value. Mr McCrea accepted the acquiring authority’s evidence that any development would be dependent on all adjacent owners being cooperative in bringing this forward, but this scenario he felt was exactly why they had acquired the plots in the first place. This was different to cases in which a party owns a small parcel of land in an otherwise landlocked area. It should be noted that the increase in compensation due to hope value was very modest – less than £1,000 in total. There was a similar outcome in Taylor & Taylor v the Metropolitan Borough of Stockport [2022].

Garner & Garner v Metropolitan Borough Council of Stockport [2021]

Prior to acquisition, the claimants’ land comprised three elements, 16.65 acres of grazing land, 2.94 acres of car park land and a site used for a telecommunications mast. The grazing land was the subject of a hope value claim by the Claimants, which was refuted by the acquiring authority on the basis that the land was located within the Green Belt . The Council submitted that this meant that there would be no prospect of developing the land in the short term. However, the Tribunal found that this was not especially determinative as “by its very nature, hope value related to a longer- term perspective, certainly beyond the eight years considered (…)” (paragraph 55). The Tribunal noted that the shortfall on local housing land supply would persist and that the the experts agreed that some Green Belt land would have to be released for development. On the other, the grazing land would make a strong contribution to the purpose of the Green Belt and its prospects for development were quite remote. Both expert valuers presented evidence of transactions for grazing land in the locality but it was hard to ascertain which transactions had included an element of hope value and which had not. Ultimately the Tribunal awarded £20,000 per acre based on the evidence before and noted that this included an element of hope value but it is not possible to assess what the uplift against existing use value given the wide range of values in the comparable evidence.

Hope against hope?

So what do these decisions tell us, if anything? We should acknowledge that the vast majority of compensation claims are settled and few require the Tribunal to determine them. That said, if “lengthy disputes” are really delaying or undermining the viability of regeneration schemes, there’s no real evidence of it in the Tribunal decisions (and neither DLUHC or the organisations supporting the proposals have provided any).

A second take away is that hope value doesn’t really add all that much to development value. In Spirerose, the “very good prospect indeed” of securing planning permission provided a 75% uplift on its existing use value. In Clearun, agreement that planning permission would be granted 18 months after the valuation date added 15%. In other cases, we see an uplift of 20% or so.

As we noted in the last blog, DLUHC’s proposals appear to be a solution in search of a problem.