Aysin Behchet v London Borough of Southwark

An auction is generally a transparent and reliable guide to the value of the interest actually sold. However, an auction price for an unusually restrictive building lease cannot, without reliable comparable evidence, establish the open-market value of an unencumbered freehold. Indexation may assist in aligning comparable evidence over a short period, preferably by a local index, but it does not convert the value of a leasehold interest into the value of the freehold.

Contemporaneous evidence from a credible local market practitioner may provide the most reliable valuation evidence. Under Land Compensation Act 1973, a basic loss payment is 7.5% of the market value of the acquired land. Reinvestment expenses are recoverable under Land Compensation Act 1961 where the replacement acquisition was in consequence of the compulsory purchase.

The claimant referred to the Upper Tribunal the compensation payable for the compulsory acquisition of a derelict, listed five-storey house. The authority acquired the property by a general vesting declaration, with a valuation date of 20 March 2008.

After vesting, the authority sold a 125-year building lease at auction for £580,000. The lease imposed extensive repair obligations, restrictions on assignment and occupation, and a substantial future rent. The claimant contended that the unencumbered freehold was worth £850,000; the authority relied principally on the indexed auction price and contended for £590,000.

The reference also concerned a basic loss payment, pre-reference costs, expenses of acquiring a replacement investment property, legal fees and valuation fees. The central issue was whether the auction price was a reliable guide to the open-market value of the unencumbered freehold interest.

1. The Tribunal determined compensation at £877,190.75, plus statutory interest after allowing for the advance payment. The acquiring authority was subsequently ordered to pay the claimant’s costs of the reference on the standard basis, subject to detailed assessment if not agreed.

2. The £580,000 auction result was the open-market value in July 2008 of the particular building lease sold. Auctions were in principle transparent and reliable methods of disposal, consistently with Stephenson and Stephenson v East Riding of Yorkshire Council [2013] UKUT 064 (LC) and Anthony Keith Allen v Leicester City Council [2013] UKUT 016(LC). But the restrictive and unusual lease terms meant that its price was not reliable evidence, without further comparables, of the value of an unencumbered freehold.

3. Indexation could assist in bringing comparable evidence into line over the short period involved. The Land Registry index for Southwark was preferable to a national index. Yet indexation of the auction result could only indicate the value of the same long leasehold interest at another date. Residual valuation evidence was given very limited weight because of its fragility, illustrated by the markedly divergent refurbishment-cost estimates.

4. The most reliable evidence was the contemporaneous view of the local agent who had inspected the property. Having made a modest adjustment from January to the valuation date and allowed sale costs, the Tribunal assessed open-market value at £800,000.

5. Section 33 A of the Land Compensation Act 1973 required the basic loss payment to be calculated at 7.5% of the market value of the land acquired, not of the total compensation claim. The Tribunal therefore allowed £60,000. Under section 10 A of the Land Compensation Act 1961, the claimant’s acquisition costs for an alternative investment property were incurred in consequence of the compulsory purchase. His shareholding in the vendor company did not prevent recovery because the company and claimant were separate legal entities. Those costs were allowed.

6. Pre-reference costs were disallowed for insufficient evidence. Fees for advice on challenging the compulsory purchase order were not recoverable under rule (6) of section 5 of the Land Compensation Act 1961, following Adrian Allen Walker v Blackburn with Darwen Borough Council [2014] UKUT 0421 (LC). Other counsel’s fees reasonably incurred in connection with the compulsory purchase, and agreed valuation fees, were allowed.

• Compulsory purchase: The acquiring authority made a compulsory purchase order under section 17 of the Housing Act 1985. The Secretary of State confirmed it on 15 August 2007. The property vested in the authority on 20 March 2008.

• Upper Tribunal (Lands Chamber): On the claimant’s reference, the Tribunal determined the compensation and later determined costs.