The Labour government’s first King’s Speech included a Planning and Infrastructure Bill which would aim to reform the law on compensation for compulsory purchase. This is where land is acquired, without the owner’s consent, for a specific purpose in the public interest.
The proposal has led to a renewed political focus on the role of compulsory purchase reform in the delivery of infrastructure and housing.
This Insight explains recent and proposed changes to compulsory purchase compensation.
What is compulsory purchase?
Compulsory purchase is a legal process by which land can be purchased without the consent of the owner. Powers of compulsory purchase are granted to local authorities, government departments and other public and private bodies by legislation. Such powers can only be used if it is in the public interest to do so.
The compulsory purchase process is often used for infrastructure projects that would not be possible if every owner of the land required needed to consent to a sale. Examples include railways, roads, electricity infrastructure, water supply, sewage disposal, schools, hospitals, housing, and urban regeneration.
How is compensation determined?
Compulsory purchase compensation aims to ensure that those affected are put in the same position as if their land had not been taken from them. A crucial consideration is the open market value of the land: what the land might be worth if sold on the open market by a willing seller (assuming the development project were not taking place).
How is development potential recognised?
In the open market, the value of land is influenced by what could potentially be built upon it (known as its development potential). This means that both existing planning permission for a specific development, and the chances of obtaining planning permission in future, may increase its value.
If the land does not have planning permission, the law sometimes allows compensation to reflect an assumption or possibility of future planning permission. This can happen in two ways: through ‘appropriate alternative development’ or ‘hope value’.
Appropriate alternative development
First, there could be an assumption of planning permission for ‘appropriate alternative development’. This is development where planning permission could reasonably be expected to have been granted either on or after the valuation date.
An assumption of this kind might be agreed between the owner of the land and the authority acquiring it, determined by the Upper Tribunal Lands Chamber (a specialist court), or recognised in a certificate issued by the local planning authority.
Hope value
Second, the value of the land on the open market may be taken to reflect a possibility that planning permission might be granted in the future (‘hope value’).
Where the landowner and acquiring authority cannot agree the amount of compensation, hope value may be established through a compensation claim issued through the courts. The uncertainty associated with hope value means that it could add less value to compensation than existing planning permission or appropriate alternative development.
What changes have already been introduced?
The Levelling-up and Regeneration Act 2023 gave certain public authorities new powers to ignore both ‘appropriate alternative development’ and ‘hope value’ in assessing compensation for compulsory purchase, by issuing a direction to this effect.
These powers only apply to compulsory purchase orders related to the development of housing, education, or NHS health facilities. Furthermore, their use must be approved by a government minister, who must be satisfied that it is in the public interest for compensation to be limited.
What further compensation reforms are proposed?
The Labour Party Manifesto 2024 committed to ensuring “that for specific types of development schemes, landowners are awarded fair compensation rather than inflated prices based on the prospect of planning permission”.
After the election, the government announced a Planning and Infrastructure Bill in the King’s Speech 2024. The background briefing notes to the speech said that the bill would ensure that compensation is “fair but not excessive where important social and physical infrastructure and affordable housing are being delivered”.
A government consultation on planning reform published in July suggested that, under the changes, compulsory purchase could involve wider use of “directions to secure ‘no hope value’ compensation” than at present.
Reactions to the proposals
Legal powers to limit compensation for compulsory purchase are controversial. Reactions to Labour’s proposals reflect a tension between those seeking to develop land in a way that is deemed to be in the public interest and the property rights of individuals affected.
The National Housing Federation, a trade body for housing associations, has welcomed the reforms. A June 2024 statement commented that “enabling local councils to buy cheaper land through Compulsory Purchase Orders without paying ‘hope value’ will allow them to build more […] desperately needed affordable homes”.
On the other hand, the Country Land and Business Association, a membership organisation for rural land and business owners, has criticised the proposals. In May 2023, Mark Tufnell, the then president, said that “hard-pressed farmers” would be forced “to sell their land for a fraction of its potential value” only for local authorities to “put it in the hands of developers who make hundreds of millions of pounds profit every year”.
A similar debate took place in the House of Lords during consideration of the Levelling-up and Regeneration Act 2023.
Modernising compulsory purchase legislation
Over recent decades, the complexity of compulsory purchase legislation has led to frequent calls for law reform. Some of the legislation, such as the Land Clauses Consolidation Act, dates back to 1845.
The Law Commission of England and Wales (a statutory body) is currently leading work to consolidate, modernise and simplify compulsory purchase legislation.
The aim of the Law Commission review, which began in February 2023, is to produce a draft bill proposing technical changes to compulsory purchase procedure and compensation.
The Law Commission is due to publish a consultation paper later in 2024, and it is likely that compulsory purchase will continue to be part of discussions about planning reform throughout this Parliament.
About the author: Gwen Edmunds is a specialist for the House of Commons Energy Security and Net Zero Committee.
Image credit: DS Pugh on geograph.org.uk. CC BY-SA 2.0.