Counting the cost of Compulsory Purchase Orders

Richard Corbett, a Manager in our Disputes, Investigations and Valuations team, explores how forensic accountants are instructed to quantify the financial losses suffered by affected businesses, assist legal teams and surveyors in evaluating claims, and provide independent expert evidence where disputes arise.

What is a CPO?

A CPO is a legal mechanism which enables certain public bodies (known as Acquiring Authorities) to obtain land or property without the owner’s consent – provided there is a compelling public interest case and where attempts to purchase by agreement have been unsuccessful. Affected parties (Claimants) are entitled to compensation so that they are left no better nor worse off as a result of the compulsory acquisition.

For the acquisition of business premises, while a surveyor would typically assess the property-related compensation, forensic accountants are instructed where there is a need to quantify trading losses or evaluate the financial impact on the business itself.

Whether instructed on behalf of the Claimant or the Acquiring Authority the objective is the same: to provide an independent, evidence-based assessment of financial loss.

What losses can arise?

The nature of the losses caused by a CPO depends on the circumstances of the business and the extent of the disruption caused by the scheme.

Business interruption claims

Where a business relocates, losses may include:

• Temporary or prolonged loss of trade;
• Increased operating costs due to:
  • Duplicated rent and/or overheads during relocation; 
  • One-off costs e.g. redundancy and closure costs;
  • Permanently increased overheads at replacement premises; and
• Increased financing costs and professional fees.

Key issues include determining how long the disruption reasonably lasts, whether trading performance eventually recovers and whether the business has fulfilled the duty that it has to mitigate its losses.

Business extinguishment claims

In some cases, relocation is not commercially viable. This may arise where:

• The business relies heavily on its location; 
• Specialist premises cannot be replicated elsewhere; or
• Regulatory or operational constraints prevent relocation. 

In these circumstances, the claim assesses compensation for the loss of goodwill resulting from being unable to continue to trade from the premises. These claims can become highly complex and often require detailed financial modelling and careful consideration of industry conditions.

Both types of claims require careful consideration of the losses that are specifically attributable to the CPO.

Scheme World v No Scheme World

Put simply:

• Scheme World = the real situation faced by the business in which the compulsory purchase proceeds; and
• No Scheme World = the hypothetical scenario in which the scheme never existed. 

The exercise to identify the No Scheme World is similar to counterfactual analysis used in commercial disputes and contract claims. The purpose is to isolate the losses genuinely caused by the CPO scheme itself. This may include losses that are incurred due to uncertainty caused by a prospective CPO, before it gets formally approved.

For example, if a business experienced declining profits due to wider market conditions unrelated to the scheme, those losses would generally not be recoverable. Alternatively, if the business would likely have grown if not for the scheme, that growth may need to be reflected in the assessment.

The No Scheme World can sometimes become one of the most heavily disputed aspects of a claim.

Forensic accounting support

The Acquiring Authority is required to pay costs incurred by the Claimant which are reasonable. This includes professional fees.

While each CPO claim is distinct, the process undertaken to assess the financial impact to the Claimant typically will involve:

1. Understanding the nature of the business; 
2. Identifying the impact of the acquisition; 
3. Establishing the No Scheme World; 
4. Analysing financial performance before and after the scheme impact; and 
5. Quantifying losses attributable to the CPO. 

Instructed in an advisory capacity

This can include:

• Assisting with preparation of claims; 
• Reviewing financial evidence; 
• Supporting negotiations; 
• Critiquing the position put forward by the opposing party; and 
• Advising other professionals including surveyors and solicitors throughout the process. 

The majority of business loss claims are settled without the need for formal litigation.

Instructed as an independent expert witness

Where matters proceed formally, a forensic accountant may prepare an expert report for use in tribunal proceedings and give oral evidence.

Expert evidence in CPO disputes is heard before the Upper Tribunal (Lands Chamber) and the expert’s overriding duty is to the tribunal rather than the instructing party.

The emphasis is therefore on independence, transparency and robust reasoning.

Resolving CPO disputes

A Claimant has six years from the date of the CPO to make a reference in the Upper Tribunal (Lands Chamber) in respect of a dispute regarding compensation.

Alternative dispute resolution methods, such as mediation, can be used to provide a more efficient and commercial route to settlement compared to tribunal proceedings. 

Where settlement cannot be achieved, the matter will ultimately progress to the Upper Tribunal for adjudication.

Final thoughts

For affected businesses, the financial consequences of a CPO can be substantial and highly disruptive. For Acquiring Authorities, ensuring that compensation claims are properly evidenced and fairly assessed is equally important.

Forensic accountants play a key role in helping parties understand, quantify and ultimately resolve complex compensation claims arising from compulsory acquisition.