National Grid Electricity Transmission Plc v Arnold White Estates Ltd

This appeal raises a novel point about the quantification of compensation payable to the owner of land in respect of the grant of a wayleave for an electric power line, pursuant to paragraphs 6 and 7 of schedule 4 to the Electricity Act 1989.

The point arises from the fact that, prior to the grant of the wayleave, the owner of the land affected by it had agreed to sell it to developers for a price which, by the time of the grant, substantially exceeded its development value on the open market, pursuant to a conditional contract which fell away because of the grant of the wayleave. The single question arising on this appeal is whether the amount of compensation payable to the owner of the land should be measured by reference to the price payable under the conditional contract or the substantially lower open market development value of the land, at the time of the grant of the wayleave. The Upper Tribunal (Lands Chamber) decided that compensation should be measured by reference to the contract price. The appellant, National Grid Electricity Transmission PLC (“National Grid”), contends that this involves a radical departure from settled principles governing compensation payable for compulsory acquisition, with major implications for the electricity supply industry.

The facts are undisputed, and comprehensively set out in the decision of the Tribunal. For present purposes, the following brief summary will suffice.

At the beginning of this century the Respondent Arnold White Estates Limited (“AWE”) was the owner of land (previously exploited by sand extraction) of about 19.5 acres south of Leighton Buzzard, referred to in the Tribunal as “Area 15C”. An overhead power line ran east-west across the middle of Area 15C, supported by pylons on adjacent land, but not on Area 15C itself. The power line overflew Area 15C pursuant to a contractual wayleave granted by AWE’s predecessor in title in 1964, which was terminable on six months’ written notice.

Area 15C was, together with adjacent land, shown in the Bedfordshire Local Plan Review 2004 as suitable for residential development. AWE promoted a Development Brief for Area 15C, together with adjoining land to the north, northeast and west which was approved by the South Bedfordshire District Council in September 2006. The development brief recognised an uncertainty whether the power line would continue to cross Area 15C or be removed, and proposed alternative development along a 54-metre wide strip underneath the power line, according to whether the line was removed or retained. If removed, then the 54-metre strip would be suitable for residential development. If retained, the presence of the power line would prohibit such development within the 54-metre strip. I will call the 54-metre strip “the pylon land”, even though there has never been a pylon on it, because this is how it has come to be described.

Planning permission for the residential development of Area 15C, together with adjacent land, was granted on appeal in December 2007, with conditions reflecting the retention or removal of the power line which broadly followed those in the Development Brief. Following the public inquiry which led to the grant of planning permission, AWE sold the whole of Area 15C to developers (George Wimpey South Midlands Limited and Persimmon Homes Limited) pursuant to two contracts both dated 20^th July 2007. One contract (“the pylon land contract”) related solely to the pylon land. The other contract related to the rest of Area 15C, on either side of it.

The pylon land contract was conditional upon the removal of the power line, and the purchase price was £5,361,246 plus VAT, indexed at RPI from the date of contract until payment. The price payable under the contract for the rest of Area 15C was also subject to indexation, but that contract was unconditional.

On 11^th March 2008 AWE served notice on National Grid terminating the contractual wayleave, and on 15^th September 2008 served statutory notice requiring its removal. National Grid then applied to the Secretary of State for the grant of a statutory wayleave under paragraph 6 of schedule 4 to the Act. After a hearing before an inspector in 2009, the Secretary of State granted the wayleave on 21^st June 2010. The result was, of course, that the pylon land contract fell away.

One effect of the economic troubles which began in 2008 was that, by June 2010, development land values in the Leighton Buzzard area had fallen substantially from their levels in July 2007. It was common ground before the Tribunal that the open market development value of the pylon land in June 2010, ignoring the pylon land contract, assuming the removal of the power line, and with the benefit of the planning permission, was only £3,195,000. By that time the price which would have been payable under the pylon land contract if the power line had been removed had risen due to indexation to £5,829,477.

Having heard expert evidence, the Tribunal concluded that the value of the pylon land subject to the statutory wayleave was, at the time of its grant in June 2010, a nominal £1, notwithstanding that the wayleave was for a period of only fifteen years, rather than in perpetuity. This conclusion of the Tribunal has not been challenged on appeal. The result was that the Tribunal awarded AWE compensation in the sum of £5,829,476, being what they described as;

“the difference between the contract price at the date of valuation and the value at the valuation date in the real world.” (Decision paragraph 97)

Section 10(1) of the Electricity Act 1989 provides two methods whereby an electricity supply undertaking may obtain the requisite rights enabling it to construct or, if already in existence, keep power lines over land. The first is by compulsory acquisition of the necessary land, pursuant to schedule 3. The second is by acquisition of wayleaves, pursuant to schedule 4. Schedule 3 incorporates, with important adjustments, provisions of Part 1 of the Compulsory Purchase Act 1965. The grant of a wayleave involves no outright acquisition of land, compulsory or otherwise, and therefore Schedule 4 makes bespoke provision for compensation. Paragraph 7 provides as follows:

“(1)

Where a wayleave is granted to a licence holder under paragraph 6 above-

(a)

the occupier of the land; and

(b)

where the occupier is not also the owner of the land, the owner,

may recover from the licence holder compensation in respect of the grant.

(2)

Where in the exercise of any right conferred by such a wayleave any damage is caused to land or to movables, any person interested in the land or movables may recover from the licence holder compensation in respect of that damage; and where in consequence of the exercise of such a right a person is disturbed in his enjoyment of any land or movables he may recover from the licence holder compensation in respect of that disturbance.

(3)

Compensation under this paragraph may be recovered as a lump sum or by periodical payments or partly in one way and partly in the other.

(4)

…”

Certain aspects of the interpretation of paragraph 7 are less straightforward than they might appear at first sight. For present purposes, I shall confine myself to those aspects which are common ground. First, the word “land” is used differently, as between sub-paragraph (1) and (2). In sub-paragraph (1) it has the broad meaning set out in schedule 1 to the Interpretation Act 1978, so as to include “any estate, interest, easement, servitude or right in or over land”. Thus, the “owner of the land” in paragraph 7(1)(b) includes the proprietor of an interest in land, such as an option to acquire it: see Oppenheimer v Minister of Transport [1942] 1 KB 242 (a case about the meaning of “lands” within section 49 of the Lands Clauses Consolidation Act 1845). “Land” in paragraph 7(1)(b) must a fortiori also include the interest of a purchaser under a contract for the purchase of land. By contrast, “land” in paragraph 7(2) appears to be used in its more limited physical sense, because of the reference to “any person interested in the land”.

Secondly, it is common ground that the valuation date for the purpose of the quantification of compensation under paragraph 7(1) is the date of the grant of the wayleave. Again by contrast, paragraph 7(2) contemplates compensation for damage or disturbance occasioned in the exercise of a right conferred by a wayleave, which may occur at any time during the period for which the wayleave is granted.

Thirdly, it was broadly common ground that, like other statutory provisions for compensation for the compulsory acquisition of, or of a right over, private property, compensation for the grant of a statutory wayleave is to be quantified in accordance with what has come to be known among compulsory purchase lawyers as the principle of equivalence. In its earliest and classic form, the principle is encapsulated in Horn v Sunderland Corporation [1941] 2 KB 26, at 40, per Scott LJ. Speaking of the Acquisition of Land (Assessment of Compensation) Act 1919, he said:

“The word “compensation” almost of itself carried the corollary that the loss to the seller must be completely made up to him, on the ground that, unless he received a price that fully equalled his pecuniary detriment, the compensation would not be equivalent to the compulsory sacrifice.”

More recently, in Director of Buildings v Shun Fung Ironworks Limited [1995] 2 AC 111, at 125, Lord Nicholls, giving the judgment of the Privy Council on an appeal from Hong Kong, described the principle of equivalence, both in Hong Kong and English law about compensation for compulsory acquisition, as follows:

“The purpose of these provisions, in Hong Kong and England, is to provide fair compensation for a claimant whose land has been compulsorily taken from him. This is sometimes described as the principle of equivalence. No allowance is to be made because the resumption or acquisition was compulsory; and land is to be valued at the price it might be expected to realise if sold by a willing seller, not an unwilling seller. But subject to these qualifications, a claimant is entitled to be compensated fairly and fully for his loss. Conversely, and built into the concept of fair compensation, is the corollary that a claimant is not entitled to receive more than fair compensation: a person is entitled to compensation for losses fairly attributable to the taking of his land, but not to any greater amount. It is ultimately by this touchstone, with its two facets, that all claims for compensation succeed or fail.”

He added, pertinently for present purposes:

“Land may, of course, have a special value to a claimant over and above the price it would fetch if sold in the open market. Fair compensation requires that he should be paid for the value of the land to him, not its value generally or its value to the acquiring authority.”

At page 126, Lord Nichols identified three conditions as flowing from the principle of equivalence, namely causation, remoteness and reasonableness (or mitigation). That passage repays close study. The three conditions have a more than passing resemblance with those applicable to the assessment of damages at common law, by reference to the restitutionary principle, originally laid down by the House of Lords in Livingstone v Rawyards Coal Company (1880) 5 App Cas 25, per Lord Blackburn at 39.

The Tribunal’s view was that fair “compensation in respect of the grant” of the wayleave (under paragraph 7(1)) was, precisely, the loss of the price which would otherwise have been payable under the pylon land contract. Applying Lord Nicholls’ three conditions, it was caused by the grant of the wayleave, because it was the grant which caused the pylon land contract to fall away. The loss of the contract price was not too remote because the loss of those contractual rights was the direct result of the grant of the wayleave. Compensation quantified by reference to the contract price gave AWE no more, and no less, than its loss, regardless whether the development value of the pylon land had risen or (as happened) fallen between the dates of the contract and the grant of the wayleave. The whole of the contract price was payable because the residual value of the pylon land, subject to the wayleave, was nominal. The Tribunal’s analysis may be summarised as a straightforward application of the language of paragraph 7(1), interpreted in accordance with the principle of equivalence.

Mr. Robin Purchas QC and Mr. Rupert Reed for National Grid submitted that the loss payable under the pylon land contract was a purely personal contractual loss falling entirely outside the scope of compensation available under paragraph 7 of schedule 4 to the Act. Mr. Purchas said that compensation under paragraph 7 (like compensation for compulsory acquisition generally) was concerned, and only concerned, with the adverse effect of the wayleave (in terms of its grant, and the exercise of rights thereunder) upon the land itself. Under paragraph 7(1) he said that, in consequence, nothing other than a diminution in market value specifically attributable to the effect of the grant upon the land could be recovered. Under paragraph 7(2), compensation was in terms limited to loss flowing from actual physical damage to land or movables, or to disturbance in the owner’s physical enjoyment of land or movables, rather than in the enjoyment of monetary benefits from its exploitation.

Mr. Purchas submitted that the principle of equivalence could not be used to confer compensation rights of a type outwith the provisions of paragraph 7, like some overarching right to damages. Since monetary benefits flowing from a pure contract which did not itself confer an interest in the land upon AWE fell outside paragraph 7, recourse to the principle of equivalence could not bring loss of that kind within the scope of statutory compensation. It followed, he said, that even if the principles of causation, remoteness and reasonableness were to be applied, such losses would in any event be too remote.

Mr. Purchas sought to fortify these submissions by copious reference to reported cases about compensation for compulsory purchase. In fairness to him, there is little authority about compensation for the grant of a wayleave, and certainly nothing which deals directly with the point in issue on this appeal.

A theme running through Mr. Purchas’ submissions was an attempt to analyse compensation for the grant of a wayleave by the use of language and concepts derived from legislation and cases about compulsory purchase. Thus he sought to analyse the provision of “compensation in respect of the grant” in paragraph 7(1) as if it had to be divided into compensation for the taking of property and compensation for injurious affection, and to analyse the separate right to compensation for disturbance in paragraph 7(2) as if it was in substance the same as the statutory right to compensation for disturbance arising from dispossession from land compulsorily acquired. This may be an easy and instinctive form of analysis to someone steeped in the law of compulsory purchase. Indeed, a comparable approach can be discerned in the submissions of Mr. Bartlett QC (again for National Grid) in Macleod v National Grid Co. PLC [1998] 2 EGLR 217, at 223 M.

For my part, I did not find that mode of analysis either illuminating or helpful. This is primarily because, from 1845, the relevant statutory provisions contemplated compensation for compulsory purchase as falling into two quite different classes than those contemplated by paragraph 7 of schedule 4 in relation to wayleaves. The division adopted in relation to compulsory purchase is into two classes: (1) compensation for the value to the owner of the land taken and (2) compensation for injurious affection to his other land: see per Scott LJ in the Horn case at page 43. In relation to wayleaves, the two types are (1) compensation in respect of the grant and (2) compensation for damage or disturbance by the exercise of the rights granted. There is in reality no land taken or other land retained in a wayleave case because, in sharp contrast to compulsory purchase, no land or interest in land previously vested in the owner is compulsorily acquired at all. A wayleave may itself be an interest in land, but it comes into existence for the first time by virtue of the grant.

I can find nothing in the terms of paragraph 7 of schedule 4, interpreted in the light of the principle of equivalence, which gives any support to Mr. Purchas’ main submission that compensation for the loss of contractual rights caused by the grant of a wayleave falls outside the scope of the compensation afforded by the 1989 Act. On the contrary, the right to compensation under paragraph 7(1) is conferred in the most general terms. The only limitation which may be said to flow from the language used is that the loss for which compensation is claimed must be loss suffered by the claimant in his capacity as owner or occupier of the land, rather than in some wholly unrelated capacity. Thus for example, that limitation would exclude compensation for loss incurred by betting on the outcome of an application to the Secretary of State under paragraph 6 for the grant of a wayleave, even if the bet was placed and lost by someone who happened to be the owner or occupier of the land in question. In this case by contrast, the loss of a contractual right to proceeds of the sale of the relevant land under a conditional contract, where the contract falls away because of the grant of the wayleave, is in my view fairly and squarely a loss suffered by AWE in its capacity as owner of the land. It was by the transfer of the land (had there been no wayleave) that the purchase money would have been acquired. Even if the rights of a contracting seller of land may, for various chancery purposes, be described as personalty rather than realty (as Mr. Reed demonstrated), it is a right inseparable from the seller’s status as owner of the land in question.

Mr. Purchas derived no support for his submission from his copious reference to authorities about compulsory purchase. For example, in Wrexham Maelor Borough Council v Macdougall and Ors (1995) 69 P&CR 109, Mr. Macdougall held a five year lease of office premises compulsorily acquired by the council. He had installed a company owned by him and his wife in the premises, and he had the benefit of a long-term service contract with that company. One consequence of the compulsory purchase was that the company’s business had to be wound down and Mr. Macdougall’s service agreement terminated early. The Court of Appeal upheld awards of compensation of £9,000 for the loss of his leasehold interest, and £61,000-odd as a loss occasioned by the termination of his service agreement. That larger loss was a purely financial loss arising from personal contractual rights. It was held to fall within the scope of compensation for the compulsory acquisition of his premises, and not to be too remote.

I have been similarly unable to find any support, in the language of paragraph 7 or in any authority, for Mr. Purchas’ alternative main submission, namely that compensation under paragraph 7(1) depends upon showing some effect upon the land itself of the grant of the wayleave, as a necessary link in the chain of causation between the grant and the suffering of financial loss. Indeed, had the submission been correct, it seems to me that it would have been just as much an obstacle to compensation based upon the destruction of the development value of the pylon land (which National Grid accept is a legitimate head of compensation) as it would be to compensation for the loss of the seller’s rights under the pylon land contract. The effect of the grant of the wayleave was to prohibit any residential development of the pylon land, in accordance of the terms of the available (or any conceivable) planning permission. Ignoring the pylon land contract for the moment, the grant put it out of the ability of the owner to turn his interest in the pylon land into money, either by selling it to a developer, or by developing it himself and selling the homes, once built, to residential occupiers. In my judgment it makes no difference in terms of a proper identification of the scope of compensation that the owner has, in advance of the grant of the wayleave, already turned his interest, conditionally that is, into money, by contracting to sell it at a future date for a formula price if no wayleave be granted. In both cases the grant of the wayleave has prohibited the owner from realising a development value for the land, and in both cases compensation is, in principle, available.

Nor, again, did Mr. Purchas derive assistance on this point from authorities about compulsory purchase. The reported cases have repeatedly emphasised that it is by reference to the value to the owner of the land being acquired that compensation is quantified, rather than (if different) its objective market value: see for example Hughes v Doncaster Council [1991] 1 AC 382, per Lord Bridge at 390e-g and 392h, and the passage from Lord Nicholls’ judgment in the Shun Fung case quoted above. This principle is fully applicable to compensation for the grant of wayleaves: see Welford v EDF Energy Networks (LPN) PLC [2007] EWCA Civ 293, [2007] 2 P&CR 15, at paragraph 31 per Thomas LJ.

The principle that compensation is based upon the special value of the land to the owner is usually relied upon (as here) by the owner for the purpose of extracting more than would be quantified by reference to the market value of the land, but for the grant of the wayleave. In the Welford case, the owners extracted substantial compensation in excess of the very low industrial value of their land, by reference to their having already commenced, and needing then to re-locate, a particular business on it.

But the “value to the owner” principle may in an appropriate case produce less compensation than would be quantified by reference to open market value. Suppose that, in the present case, development land values around Leighton Buzzard had increased rather than fallen between the date of the pylon land contract and the grant of the wayleave. As the Tribunal observed in paragraph 37 of the Decision, AWE’s compensation would still have been quantified by reference to the contract price, rather than the higher open market value. Suppose that the pylon land had risen in value to £8million. The buyers under the pylon land contract would then have enjoyed an interest in the land by virtue of their contract which, but for the grant, would have been worth in excess of £2 million at the valuation date. The pylon land contract would be “land” within the meaning of paragraph 7(1)(b), the buyers would be its owners, and prima facie entitled to compensation in that amount. If as Mr. Purchas submitted the pylon land contract was nonetheless irrelevant to the quantification of AWE’s compensation in respect of the grant, National Grid would have to pay £8million to AWE and a little over £2 million to the buyers, in respect of land the development value of which had never exceeded £8 million. Mr. Purchas’ analysis of this situation, when put to him by the court during argument, was that AWE would indeed obtain £8 million, but the buyers would have no claim to compensation under paragraph 7, and would be able to recover for the loss of the value to them of the pylon land contract only if that agreement gave them a common law right of action in contract against AWE for an appropriate share. But the pylon land contract contained no such provision, and Mr. Purchas was unable to offer any convincing reason why the buyers would, in that event, have been disentitled to compensation for the loss of their valuable interest in the pylon land. In my judgment compensation payable on those facts to AWE would still have been the indexed contract price. The difference between the contract price and the (higher) development value at the valuation date would have represented the fair compensation payable to the buyers.

Mr. Purchas sought to support his submission that the pylon land contract was an inappropriate basis for the quantification of compensation under paragraph 7 on the ground that it was an outright contract for sale, whereas the statutory interference with the land consisted only of a fifteen-year wayleave. How could it be right, he asked rhetorically, that AWE should recover by reference to a complete disposal of its freehold interest, and yet be free to have another bite of the cherry in fifteen years’ time?

The short answer to that question lies in the Tribunal’s conclusion, not challenged on appeal, that the residual value of the pylon land subject to the wayleave was nominal. The longer answer is that the special value of the pylon land to AWE constituted by the price payable under the pylon land contract is simply the value of the land to AWE on the counter-factual hypothesis that the wayleave is not granted. Open market value performs exactly the same function where there is no contract of that type. The fact that the statutory interference consists of a wayleave over, rather than compulsory purchase of, the relevant land permits the compensating party to argue that the owner retains a residual value in the land which falls to be brought into account in the quantification of compensation. The ordinary open market value assessment assumes, just like the pylon land contract in this case, that the land is offered for outright sale, rather than just for a fifteen-year lease. In my judgment this submission is therefore without substance.

Finally, Mr. Purchas sought to give colour to his submissions by referring to the fact that the pylon land contract was negotiated with a possible compensation claim in mind. He implied that if it were to be held to be legitimate to quantify compensation by reference to contracts of this kind, then a ready means of extracting excessive sums from electricity supply undertakings would be opened up.

It is clear from the Decision read as a whole that the Tribunal were alert to this risk. Their conclusion, at paragraph 96 of the Decision, that the contracts (including the pylon land contract) were justifiable for commercial reasons, and in no sense shams, is a sufficient answer to that concern, on the facts of this particular case. The parties were at arms length and it was by no means a foregone conclusion when the contracts were made that the pylon land would be sterilised for development purposes by the later grant of a wayleave.

No doubt tribunals will be astute in the future to detect and defeat any collusive attempts to manufacture artificially high contract prices ahead of the grant of wayleaves for the purposes of generating an inflated level of compensation. But all that happened in the present case was that AWE crystallised the development value to it of the whole of Area 15C, not limited to the pylon land, by the two sale contracts made in July 2007, by reference to development values then prevailing. It is only with the benefit of hindsight that it is now possible to discern that, in doing so, AWE made a very good bargain.

For those reasons, which are in substance the same as the reasons given more succinctly by the very experienced Tribunal, I would dismiss this appeal.

I agree.

I also agree.