Literature Review: Principle of Equivalence
List of References: 12
Literature Review
Principle of Equivalence
Background
Usually, whenever a property is purchased or acquired from a willing or non-willing seller, it is expected that a fair compensation is given to those whose interests are deprived. However, it may be difficult to determine what a fair compensation constitutes. In some cases claimants may receive more or less compensation compared to the value of their property. In other instances, the monetary sum provided may be a huge sum, but it may not cover non-quantifiable losses such as psychological and social implications. As experience has shown, there are high costs associated with human displacement (FAO 2009). These include disruption of social cohesion in a community, and altering the way of life and livelihood patterns (Foncello 2005). Hence, a holistic mitigation may not be achieved through the standard compensation package, regardless of how bountiful it may be. Furthermore, such unavoidable costs are magnified many times over where a compensation process is designed or implemented poorly (Kelly 2005). Hence, livelihoods may be destroyed if the owners and tenants are inadequately compensated (Foncello 2005). As such, many jurisdictions have constituted codes, or principles of compensation, that guide how people deprived of their interests should be compensated. One of such codes is the principle of equivalence (PoE).
The Principle of Equivalence
In a nut shell, the principle of equivalence requires that a balance is established between public need for land on one side, and the assurance of land tenure security and protection of private land ownership rights on the other (Mangioni 2014a). As a concept applied in compensation, the principle of equivalence (POE) requires that claimants who are compensated receive no more or no less than their original value (Lindsay 2012). Hence, the nature of compensation should leave the persons whose land or property was acquired, in a similar circumstance that they were in, before the acquisition (Vaughan & Smith 2014). That is, they should neither be worse off nor better off, hence, the equivalence. However, applying the principle of equivalence may be far from practical. Putting financial compensation aside, it is difficult to determine a standard method for compensating non-monetary forms of loss such as social and psychological impacts (FAO 2009). Hence, a variety of factors need to be recognised in developing the compensation payable. As recognised in many property laws, the principle of equivalence is the basis for compensation in compulsory acquisition (DCLG 2011; Vaughan & Smith 2014).
Origin and Development of the Principle of Equivalence
The PoE has been established through case law from over a period of many decades. As such, legal institutions have determined recompense by certifying that claimants are in no better or worse level financially that they would have been if their interest was not acquired (Lindsay 2012). One of the cases in which the PoE was used in a ruling is the Stebbing v Metropolitan Board of Works (1870) LR 6 QB 37. Here it was determined that the compensation strategy should be of value to the owner whose interests are being acquired rather than the public agency doing the acquisition. Similarly, in determining the compensation payable, the principle of equivalence evolved in the case Director of Buildings v Shun Fung Limited (1995) 2 AC 111 PC in Hong Kong. The ruling in the hearing emphasized on fair compensation in terms of reimbursing the value of land as perceived to the owner rather than the general value of land or of the acquiring agency. Thus, the compensation payable should cover severance, injurious affectation and disturbance claims. Severance refers to losses retained from the value of the land because of an acquisition (Foncello, 2005). On the other hand, injurious affectation refers to the value of the land losses retained because of the proposed construction and the use of the acquired land (Kalbro et al. 2011). This is payable when part or no land has been taken from the owner (DCLG 2011). Additionally, disturbance claims evaluate the costs and losses incurred by the property owner as a result of the acquisition (Denyer-Green 2013).
Another demonstration of the equivalence principle in the compensation code is observed in the case Horn v Sunderland (1941) 2KB 26 CA in England, which ruled that the claimant shall be paid neither less nor more of his loss. This case emphasized on the need to consider the value of the land alone as the basis for compensation (Megarry et al. 2012). Nevertheless, factors that needed to be considered to arrive at a compensation amount included: the nature of the property being acquired, whether it was question to a restrictive covenant or tenancy, the property’s condition, its use and potential modifications, the date of valuation, and the losses and costs incurred by the owner as a result of the purchase or acquisition, also known as disturbance claims (Vaughn & Smith 2014). Still, in the appealed case –Pointe Gourde Quarrying and Transport Company Limited v Sub Intendent of Crown Lands (1947) AC 565, it was established that compensation of an interest will not include an increased value earned from a scheme undertaken in the acquisition (Murning, Wilson & Evans 2001).
All the above judgements are codified in the United Kingdom’s Land Compensation Act of 1961 (Megarry et al. 2012). This is the English land law that explains the compensation codes by which owners whose land interests are deprived should be reimbursed. Figure 1 below shows how compensation payable is determined in the UK for residential owners and occupiers, which applies the concepts in PoE.
Figure 1: Compensation Payable to residential owners and occupiers in the UK
(DGLC 2011: 6)
Empirical Research on the Principle of Equivalence
The nature by which private land occupants and owners are compensated is of great interest to the academic and practical worlds. Actually, the principle of equivalence permeates and underpins most ideology on acquisition and compensation (Akujuru & Ogbonda 2016). As per the doctrine of equivalence, the acquirer should reimburse appropriate and sufficient compensation to the claimant. According to Macken, Galligan & McGrath (2013), compulsory acquiition is one of the relentless enforcement by the governemnt to its citizens. As matter of fact, a people’s notion of the reasonableness of compulsory purchase in public use may immediately change with the discovery that their property is affected (Lindsay 2012). Worse, there may lack legal redress or compensation for a decrease in the value of property caused by either the existence or use of a public scheme (Murning, Wilson & Evans 2001).
The controversy in acquisition is aggregated by the inexperienced status of the legitimacy of the systems that are used in compensation of those affected (Christensen & Duncan 2004). As matter of fact, there is evidence showing continuos widespread dissatisfaction with the acquisition and compensation processes for many years. In Scotland, and Britain, anectodal perspectives reveal that dispossessed proprietors have endured unfulfillement with the compensation given for many years (Megarry et al. 2012). These findings are similar to those ound in several other countries worldwide including the United States, Australia, China, and Middle East and African countries. Anim-Odame (2011) admits that the greatest challenge that the government of Ghana faces in real estate is the ability to reimburse fair and sufficient compensation in a timely fashion. This is despite the fact that the country’s operative constitution emphasizes on a correspondent compensation procedure based on the reistatement of the principle of equivalence. Furthermore, Akrofi and Whittal (2013) agree that the lack of perceived practicality in equivalent or fair compensation is the main reason for disputes in land repayment procedures in Ghana.
Ironically, the public authorities that acquire the land usually believe that they have applied the appropriate statutory powers to ensure equivalent compensation. However, studies of the property owners who have experienced acquisitions suggest that there is a culture of acceptance in many countries despite the feelings of unstatisfaction with the reimbursement (Murning et al. 2001). A questionnaire survey of property valuers in Malaysia was conducted by Alias and Daud (2006). They wanted to discern the practitioner’s perspectives on the amount of monetary reward that is appropriate to fulfull the constitution mandate on equivalent compensation. As the authors hypothesized, giving adequate monetary rewards in return for property does not fulfill the condition of equivalence. True to their predicition, Alias and Daud (2006) found that the participants preferred that governments should use alternative startegies to land acquisition as the process does not bring out the true intent of equivalent compensation. In fact, compensation is never achieved where money does not replace the lossess that cannot be replaced by monetary value, such as a a livelihood depended on the land, or rights to an ancestral land. Hence, they advise that compensation laws should go beyond legal and valuation constructions. Instead, the concept of justice between main and the society should be explored.
In China, matters of land acquisition are constituted in the People’s Republic of China Land Administration Law but which does not address the matter of fair compensation (Chan 2003). Instead, settlement subsidy payments are given by calculating the value of the land and dividing it among the number of dispossed people. This kind of compensation may not be equivalent to all dispossessed people, depending on their needs, and the value that they got or perceived from their land originally. In New Zealand, adequate compensation is considered through the market valuation of the property and additional compensation may be given as injury affectation and disturbance claims (Todd & McDonagh 2010). These aspects match with the concept of equivalence repayment, but as Todd and McDonagh (2010), the compensation is actually low if injurious affects are considered beyond monetary value.
Understandably, the determination of equivalent compensation can be challenging especially where land markets do not exist or are too weak, the land is communally owned, or when the people have the only rights to use the land (Kotaka & Callies 2002). Hence, inadequate compensation may occur as aggravated by several aspects. Factors that contribute to unjust compensation include poorly drafted legislation which creates confusion, errors, conflicts, and chances to power abuse (Lindsay 2012). Furthermore, poor governance and a lack of standards enable corrupt officials to provide favourable compensation to those who offer bribes while the poor claimants remain at a disadvantage. Also, the lack of clear legal rights of the people to the land, unawareness of their rights, or where they have little negotiating power, can make it difficult to establish equivalent compensation (FAO 2009). In fact, the appeal processes are expensive, and inaccessible to the poor. Due to their complicated nature, people are expected to hire attorneys at a cost on which only the rich people can afford, while the poor accept the offer even if they feel it is inadequate. Furthermore, new of the public project may affect the value of the land leading to low compensation if the value falls, or inequitably high compensation but greater costs to the acquirer if the value increases (Mangioni, 2014). Still accurate valuation is difficult because it comes with higher costs and lengthy procedures where each land piece must be scrutinized to assess its value and improvements. In fact, a shortage of professional valuers as Akujuru & Ogbonda (2016) found in Nigeria, increases the costs related with compensation determination. Situations where land sales are informal or the land markets do not exist makes it difficult to provide dependable indicators for valuation (Kalbro et al. 2011). Most of the time, it is difficult to financially calculate non-economic losses, such as cultural, religious, and historical claims to the land (FAO 2009). There are also psychological implications that may go uncompensated, for example, depression associated with cutting ties to one’s home, or confusion, anxiety, or apathy resulting from financial loss of an investment.
Principles of Fair Compensation in Acquisition
Compulsory acquisition does not have to be a painful affair to those affected if the principles of legislation on compulsory acquisition are followed. The principles guiding compulsory acquisition are the protection of a rightful process and fair procedure, good governance, and the principle of equivalence.
(FAO 2009)
Major issues to be addressed and woven in the principle of equivalence include the practicality of compulsory acquisition procedures, and the way in which these processes promote or prevent the fulfilment of equivalence. Additionally, appeal procedures should be made accessible and consider the evaluation of disputed compensation. Also, the problems experienced in the application of the nuisance provisions in major public projects should be addressed. As Anim-Odame (2011) recommend, achieving equivalent compensation requires a collaborative initiative between valuers in both the public and private sectors to help build a contemporary standard real estate database. Furthermore, for the compensaton to be seen as fair, sufficient evaluation skills must come into play, as well as the use of appropriate techniques to provide equal and adequate compensaton payable (Akujuru & Ogbonda 2016).
Summary
The principle of equivalence requires that occupants and tenants who have faced compulsory acquisition of their lands be compensated not more or less than the value of their land or property. However, the evidence emerging from the literature is that it is difficult to determine a fair means for equivalence compensation. Even where the compulsory acquisition legislation is followed in a just manner, there are social and psychological implications that are difficult to quantify financially. In other cases, corruption in public institutions, unawareness of rights, and inadequate skills in land valuation contribute to inaccurate compensation determination, hence unfair compensation. A lot of literature is dedicated on the laws of compulsory acquisitions in various jurisdictions worldwide. Future research should add studies about the impacts of poor compensation determination in communities worldwide. Findings should oversee policy changes for better application of legislation principles in compulsory land acquisition.
List of References:
Akrofi, E & Whittal, J 2013, 'Compulsory acquisition and urban land delivery in customary areas in Ghana.', South African Journal of Geomatics, vol 2, no. 4, pp. 280-295.
Akujuru, V & Ogbonda, U 2016, 'Rationalising the contemporary issues in the valuation of land for infrastructural development in Nigeria.', Donnish Journal of Research in Environmental Studies, vol 3, no. 1, pp. 1-7.
Alias, A & Daud, N 2006, 'Payment of adequate compensation for land acquisition in Malaysia.', Pacific Rim Property Research Journal, vol 12, no. 3, pp. 326-349.
Anim-Odame, W 2011, 'Compulsory acquisition and compensation in Ghana: Principles and practice.', American Real Estate Society Conference in Seattle-Washington, USA rom 13-16 April 2011, IREBS Foundation for African Real Estate Research, Washington.
Chan, N 2003, 'Land acquisition compensaion in China: Problems and answers.', Internarional Real Estate Review., vol 6, no. 1, pp. 136-152.
Christensen, S & Duncan, W 2004., Professional liability and property transactions., Federation Press., New South Wales.
Denyer-Green, B 2013, Compulsory purchase and compensation, 10th edn, Taylor and Francis, New York.
Director of Buildings v Shun Fung Limited, 2 AC 111 PC
Foncello, M 2005, 'Adverse possession and takings seldom compensation for chance happenings.', Seton Hall Law Review, vol 35, pp. 667-697.
Horn v Sunderland (1941) 2KB 26 CA.
Huenefeld, R 2006, 'The unalienable right of property, its foundation, erosion and restoration', Journal of Christican Jurisprudence, vol 8, pp. 147-187.
Kalbro, T, Sjodin, E, Norell, L & Paulson, J 2011, 'Compulsory acquisition and compensation', KTH, Stockholm.
Kelly, D 2005, 'The public use requirement in the eminent domain law: A rationale based on secret purchases and private influence.', Harvard Law School, Cambridge.
Kotaka, T & Callies, D 2002, Taking land: Compulsory purchase and regulation of land in Asian-Pacific countries, University of Hawaii Press, Honolulu.
Lindsay, J 2012, 'Compulsory acquisition of land and compensation in infrastructure projects', PPP Insights, vol 1, no. 3, pp. 1-10.
Macken, J, Galligan, E & McGrath, M 2013, Compulsory purchase and compensation in Ireland: Law and practice, Bloomsbury Professional Limiyed, England.
Mangioni, V 2014a, 'Modernising Compensation Principles for the Regeneration of Land Uses in Highly Urbanised Locations', Engaging the Challenges, Enhancing the Relevance, FIG Congress, Kuala Lumpur, Malaysia.
Mangioni, V 2014b, 'Refining principles of compensation in land acquisition for urban renewal.', 20th Annual Pacific Rim Real Estate Society Conference, Christ Church, New Zealand, New Zealand.
Megarry, R, Harpum, C, Wade, W, Bridge, S & Dixon, M 2012., The law of real property., Sweet & Maxwell., UK.
Murning, I, Wilson, D & Montagu, E 2001, 'Review of compulsory purchase and land compensation', Central Research Unit, Crown, Edinburgh.
Stebbing v Metropolitan Board of Works (1870) LR 6 QB 37.
Todd, M & McDonagh, J 2011, 'Solatium payments for public works: An international comparison.', Pacific Rim Real Estate Society 2010-11, Lincoln University, Christchurch.
United Nations Food And Land Organization 2009, 'Land tenure studies: Compulsory acquisition of land and compensation.', United Nations, Geneva.
Vaughan, D & Smith, L 2014, 'An introduction to compulsory purchase valuation principles spanning 150 years.', Journal of Building Survey, Appraisal and Valuation, vol 3, no. 2, pp. 184-189.
Wyatt, P 2013, Property valuation, John Wiley & Sons, London.
