Principles and Rules Governing Valuation in UK Vs South Korea

Introduction

The Food and Agriculture Organization (FAO) of the United Nations Rome claim that sustainable development necessitates governments to offer public facilities as well as infrastructure as an effort towards ensuring there are safety and security, health and welfare, social and economic improvement, and protection and renewal of the natural environment (FAO, 2008). However, the owner of selected land may not be willing to sell it at the time of need. Therefore, the government is compelled to assume powers allowing it to acquire the chosen land forcibly. On this account, the government will force the private landowner to sell their property to be used for the specified purposes as a measure for realizing sustainable development (FAO, 2008). Compulsory acquisition refers to authorizing the government to obtain private land for public use without seeking the consent of its owner or occupant (Lindsay, 2012). Similarly, the acquisition of investors’ property is called expropriation (Gabagambi, 2016). According to Khan (2015), the power authorizing the government to acquire private property for public use is known as the ‘Eminent Domain’. Vaughan and Smith (2014) reiterate that any public office seeking to acquire private land compulsorily should demonstrate that obtaining the land is indispensable for the accomplishment of a significant project fulfilling the public interest.

The forceful acquisition of land has attracted the attention of many scholars who perceive it as a subtle issue and is increasingly becoming the context of discussions related of rapid growth and changes in land use (FAO, 2008). This is attributed to the increasing pressure pushing the government to provide public services as the demand for land increase rapidly. From the perspective of government and other economic actors, the often conflictual and inefficient aspects of the process are seen as a constraint to economic growth and rational development (FAO, 2008). It is fair to acknowledge the complexity of the compensation rules during compulsory acquisition and how these rules are applied is likely to be unfair at times (Vaughan & Smith, 2014). For this reason, there is a need to develop clear regulations guiding the compulsory acquisition. The purpose of this paper is to compare and contrast with the principles and rules governing valuation where land and buildings are compulsorily acquired in the UK and Saudi Arabia.

Valuation for compulsory acquisition in the UK

The right to reimburse and steps for evaluating the appropriate value of the land or building under compulsory acquisition is derived from what is typically known as the “Compensation Code”. It is comprised of Acts of Parliament, case law and well-known practice (Land & Property Services, 2018). The general principle guiding valuation of land compulsorily acquired is based on the principle of equivalence. It, therefore, means that the owner of the land should not be financially worse off following the acquisition as compared to before. Similarly, the landowner should not be any better off (Land & Property Services, 2018). The entire valuation processes are divided into two: compensation when land is taken and compensation when land is not taken.

The land is said to be taken when it has a general market or demand. For such cases, compensation will be guided by the market value of the land. However, when dealing with extraordinary situations where the land lacks general market, compensation is likely to be evaluated by putting into account the cost of providing an “equivalent reinstatement” of the property (Land & Property Services, 2018). Disregarding compulsion is a requirement during the valuation process to ensure there is neither addition nor reduction in the value of the land is made to reflect the fact that it was acquired compulsorily acquired (Land & Property Services, 2018). Therefore, the value of the land acquired should match that in an open market transaction between willing parties. Any increase in the value of the property which is attributable to a use of the property which is unlawful or detrimental to the health of the occupants of the premises or public health may be disregarded (Land & Property Services, 2018).

In circumstances where the outstanding loan on the mortgage (lender) exceeds the value of the property, the value of the property being acquired is agreed between the acquiring authority, the lender and the borrower. On the other hand, if the value of the property is less than the outstanding debt on the mortgage, there will be no compensation payable to the borrower (Land & Property Services, 2018). In circumstances where the outstanding loan on the mortgage exceeds the value of the property, there is no compensation to the mortgagor (Borrower) in respect of the property. The acquiring authority will pay the value of the property to the lender. A person living in the property may be entitled to a home-loss payment in addition to any other compensation due (Land & Property Services, 2018). The home-loss payment is an additional sum to reflect and recognize the distress and discomfort of being compelled to move out of your home. When no land is taken but statutory powers are exercised, compensation can be claimed for: (a) a reduction in the value of your property caused by the execution (construction) of Public Works; and (b) a reduction in the value of your land caused by the subsequent use of Public Works (Land & Property Services, 2018).

Valuation for compulsory acquisition in Saudi Arabia

Government’s expropriation power is applicable for ‘public projects’ documented in the Land Expropriation Act. The law requires any land compulsorily acquired to be used for national defence or military purposes, urban infrastructure, social education or arts, housing construction or housing sites preparation for lease or transfer, etc. (La Grange & Jung, 2004). Generally, compensation prices for the expropriation of private property are significantly lower as compared to the market prices during the initial stage of economic development. However, this scenario had changed with time, especially following the success of the June 13th Democratization Movement (1987) when both central and local government and also public enterprises paid focused on just and fair compensation (La Grange & Jung, 2004). Therefore, the South Korean government has accomplished market levels of compensation presently.

In addition to cash compensation, non-cash compensation tools have also been utilized, for example, employing the original owners or according them acquisition rights for public housing. Compensation prices have also tended to hike based on the level of dissatisfaction expressed by the landowners (La Grange & Jung, 2004). In the event the landowners decline expropriation decisions, the government is allowed to appeal to the courts, the final stage of private ownership protection. The compensation amount of expropriation and court appeal is on average 3.2 times and 4.5 times higher respectively as compared to the buying offer before approval of the project (La Grange & Jung, 2004), see appendix 1. Land for public housing is sold at less than or equal to development costs and land for private housing (bigger houses) is sold at appraised price, which is still lower than market prices. In return, housebuilders are required to produce an agreed number of units within an agreed period (La Grange & Jung, 2004). Therefore, land development becomes profitable for the state despite subsidizing rented housing and national housing.

Comparing valuation for compulsory acquisition in Saudi Arabia Vs the UK

In both the UK and South Korea, market prices are used to determine the value of the property under compulsory acquisition. For the UK government, the compensation should match the market price while for the South Korean government, the value should be less than the market prices. Tkachuk (2019) claims that the current market situation helps to determine the fair value, which is necessary to characterize the returns on investments. Despite the similarity in using the market price to determine the value of the compulsorily acquired property, there are differences in the principles and rules governing valuation where land and buildings are compulsorily acquired in the UK and Saudi Arabia.

In the UK, the general principle guiding valuation of land compulsorily acquired is based on the principle of equivalence where the owner of the land should neither be financially worse off following the acquisition neither be any better off (Land & Property Services, 2018). On the contrary, the principle of equivalence does not apply in the valuation for the expropriation of private property. For example, the compensation amount of expropriation and court appeal is on average 3.2 times and 4.5 times higher respectively as compared to the buying offer before approval of the project (La Grange & Jung, 2004). This means that the property owner is likely to better off at the time of project approval as compared to before the project was approved.

Moreover, the UK government wants the value of the compulsorily acquired property to be compensated at the market value. This means that the value of the land acquired should match that in an open market transaction between willing parties (Land & Property Services, 2018). Nonetheless, the South Korean government wants the value of the compulsorily acquired property to be compensated at appraised prices (usually less than market prices). For example, the Residential Site Development Promotion Act allows the buying of land in project areas from landowners at appraised prices for site formation purposes and resale to private developers for the construction of dwellings or other structures (La Grange & Jung, 2004). This is means the value of the compulsorily acquired property will have higher compensation in the UK than in South Korea since it must tally with the market price.

Another difference emerges from the mode of compensation. In the UK, only cash compensation is used to determine the value of the compulsorily acquired property. However, the South Korean government allows either cash compensation or non-cash compensation. For example, Land readjustment (LR) requires small landowners donate their land to the government for development, and in return receive either serviced land or money in proportion to the value of the property they contributed to the project less development and other costs (La Grange & Jung, 2004). Employing the original owners or according to them acquisition rights for public housing can be used to determine the value of a property for non-cash compensation.

Conclusion

The purpose of this paper is to compare and contrast with the principles and rules governing valuation where land and buildings are compulsorily acquired in the UK and Saudi Arabia. It was found that both UK and South Korea principles and rules use market prices are used to determine the value of the property under compulsory acquisition. However, there were several differences between principles and rules governing the valuation of properties under compulsory acquisition. In conclusion, the compulsory acquisition powers discussed in this article were in response to the pressure the private landowner to sell their land to be used for the specified purposes as a measure for realizing sustainable development.

References

FAO. (2008). Compulsory acquisition of land and compensation. Food and Agriculture Organization of the United Nations. Retrieved from http://www.fao.org/3/a-i0506e.pdf

Gabagambi, C. (2016). The practical challenges facing expropriation or taking of investors’ property by the hosting states. How should it be? Journal of Asian and African Social Science and Humanities, 2(4), pp. 1-16

Khan, M. I. (2015). The eminent domain of land acquisition: An embedded instrument of economic exclusion. International Journal of Management and Humanities, 2(2), pp. 1-7.

La Grange, A., & Jung, H. N. (2004). The commodification of land and housing: The case of South Korea. Housing Studies, 19(4), 557-580. https://doi.org/10.1080/0267303042000221963

Land & Property Services (2018). Compulsory Purchase and Compensation: A Guide to Compensation for Residential Owners and Occupiers. Department of Finance. https://www.finance-ni.gov.uk/sites/default/files/publications/dfp/Residential%20compensation%20guide%

Lindsay, J. M. (2012). Compulsory acquisition of land and compensation in infrastructure projects. PPP Insights, 1(3), pp 1-10. Retrieved from https://library.pppknowledgelab.org/d/1219/download

Tkachuk, N. V. (2019). Historical cost and fair value: advantages, disadvantages, application. Journal of History Culture and Art Research, 8(1), pp. 173-182. doi: http://dx.doi.org/10.7596/taksad.v8i1.2052

Vaughan, V., & Smith, L. C. (2014). An introduction to compulsory purchase valuation principles spanning 150 years. Journal of Building Survey, Appraisal & Valuation, 3(2), pp. 184-189. Retrieved from https://www.blmlaw.com/images/uploaded/File/News/Sep14/JBSAV106.pdf

Appendices

Appendix 1: Level of publicly assessed land prices to compensation amounts

(Source: Grange & Jung, 2004)