The House of Commons Housing Communities & Local Government Select Committee Land Value Capture Inquiry report is great, but dangerous. It is a welcome reminder that the planning system can, and should, do more to capture the cost of the infrastructure required to support development. It is also problematic because it suggests a range of new “toys”, including a review of CPO compensation provisions, that is politically unworkable, a distraction and unnecessary.

Right Price

The report is clear that landowners, and developers on their behalf, already make significant contributions towards infrastructure and affordable housing. The combination of planning obligations and CIL can work effectively. With more local authority resource, greater transparency and a stronger emphasis on the local plan, even more can be achieved. As the report indicates, proper planning requirements should be viability tested and reflected in planning policy and a reformed and simplified CIL. Those needs will then, perhaps slowly, be “hardwired” into land prices. Land will be “right priced”.

No end to hope

A number of witnesses, and the evidence, emphasise that using planning policy is not a panacea. It will not fund all infrastructure requirements.  It will not solve the housing market problem.  Markets in different parts of the country are very different. The planning system can be used to secure a full contribution to infrastructure in parts of the South East, in a way that is simply impossible in parts of the North West.  Local planning processes can reflect those differences better than any sweeping national change.  Similarly, right pricing also requires some market sensitivity and testing. The aim should be to maximise the contribution that landowners make to infrastructure, whilst still allowing the land market to function. That means developing policies in a way that still leaves a sensible market value.

In urban areas that market value will, often, reflect the existing use value plus a sensible margin and an incentive to bring land to the market. For greenfield sites, the market value will need to reflect an amount needed for landowners, or promoters, to bring forward development and recycle value themselves into infrastructure delivery and place-making. However, landowners need to recognise that any existing “hope value” is not a permanent or fixed part of market value. As the market, planning policy and CIL levels change hope value necessarily also has to adjust. Any balancing exercise should diminish, but not dash, hope.

Thin Ice

Perhaps the more important Select Committee issue is the suggestion that the 1961 Land Compensation Act should be changed. In broad terms, the Committee recommend that land being compulsorily acquired should be acquired at existing use value instead of market value. That would be resisted. It would create a two-tier land market – with different values applying to adjacent plots depending on whether it is being sold on the open market or being publicly acquired. How would that work? Would that meet one of the tests that the Committee set for itself – fairness?

It is also unnecessary. The Committee attributes the success of the first generation of new towns to there being a different CPO compensation code, and suggests that the same result would not be achieved today. That is just wrong.  If a site for a new town is compulsorily acquired, the valuation will disregard the “scheme”.  In most cases, that will mean the land is acquired at something close to the existing use value – most sites would not be developed in the absence of the new town proposal. Even if, in the absence of the new town proposal, there would a development value to the site then a properly constructed planning policy framework will require any new development to fund the necessary infrastructure and the cost of doing so will be reflected in the land value.

Keep it simple

Why is there a need to change legislation to do something that can, largely, already be achieved without burdening the system with more complexity and change? It should be a fundamental principle of CPO compensation that landowners receive a proper market value for their land. The Parkhurst Road case has made it clear, quite rightly, that market values should reflect planning policy. If that happens, then the hope value component of market value will, properly, be adjusted by the proper attribution of infrastructure costs.   If, after the proper deduction of those costs there is still a margin and a residual hope value, what is the justification really, for amending the compensation code to take that?  If there is a justification for taking that capital gain then the tax system should be used to do so rather than playing games with compulsory purchase compensation which are ultimately likely to slow down development and unhinge investment.

The Localism Act 2011 introduced a number of community rights, including provisions to help communities safeguard land and  buildings serving a community purpose. The asset of community value, or ACV, regime allows local communities to identify land  or buildings that serve a purpose to further the social wellbeing or social interests of the local community, and provide the community with an opportunity to bid for the land or building when the owner decides to sell – known as the community right to bid. Lucy We analyse the impact of land and buildings being listed as ACVs on development schemes, as illustrated by three recent cases.

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This article was first published in Property Law Journal (August 2018) and is also available at www.lawjournals.co.uk

A new Compulsory Sales Order (CSO) power could tackle the blight of abandoned buildings and parcels of vacant and derelict land in town centres and communities across Scotland, according to a report published by the Scottish Land Commission (SLC).

The proposed new power would provide planning authorities with a mechanism to bring sites and buildings that have been unoccupied and/or derelict for an undue period of time, and where this is having a detrimental impact on the surrounding community, back into productive use.

Communities and local authorities already have a number of policy instruments – including compulsory purchase orders – which can be used to help regeneration. However, these policies require a clear plan in place as to how the land or building in question would be used. In many cases, local authorities and communities do not have a specific end use in mind for problematic sites but simply wish to see them used for some productive purpose. Resource constraints may also deter local authorities from pursuing a compulsory purchase action.

Although recent right to buy legislation would provide a potential route for bringing sites back into productive use, restoring some sites would be complex and technically challenging and, often, there is no desire on the part of the local community to take on such a project (see our Real Estate’s team’s recent article).

Whilst the SLC’s suggestion is that CSOs could be part of a toolkit to bring unused land back into productive use, the report states that a CSO would be used as a power of last resort and that councils and land owners should work together to try and find solutions first. As a CSO would involve the state directly interfering with an individual’s property rights by forcing a sale of the relevant property, the public interest in doing so must clearly outweigh the cost to the individual. Examples of the types of sites that might be tackled using the new power include sites such as empty homes, abandoned shopping centres, derelict hotels, gap sites and abandoned or derelict commercial buildings.

The SLC suggests that the real strength of CSOs lies in the role they could play in facilitating constructive dialogue between local authorities and owners of problematic sites. Certainly, in some situations, the serving of a preliminary investigation notice in relation to a site could incentivise an owner to take action.

The Scottish Government has committed to bring forward CSOs during the course of the next parliament and the SLC report is intended to provide the Scottish Government with a robust framework to do so. Clearly, any mechanism which could facilitate the redevelopment of vacant or derelict brownfield sites is to be welcomed, but it remains to be seen how Scotland’s already under-resourced planning authorities would be able to deal with the new opportunities should the SLC proposals be introduced.

A late amendment to the Neighbourhood Planning Act 2017 amended the New Towns Act 1981 to allow locally led new towns to be designated and for development corporations to be set up to deliver them. Kept to a single section, the 2017 legislation needed regulations to put flesh on the bones. The regulations arrived yesterday. They are supported by guidance that sets out when the Secretary of State will be willing to designate a locally led new town.

In very broad terms if a local authority wants to promote a new town then it will normally do so through a local plan process, securing an allocation. A request will then be made to the Secretary of State who, after consultation, will consider whether it is in the national interest for a new town to be designated. He will need to be persuaded about issues of community participation, deliverability, potential alternative delivery vehicles, and the adequacy of controls on design, sustainability and stewardship. If the application is successful then the Secretary of State will appoint the local authority or authorities as an oversight authority whose primary responsibility will be to control the designated development corporation and make sure that it delivers a high quality sustainable community with proper stewardship arrangements.

The development corporation will promote masterplans and Local Development Orders, both approved by the oversight authority, that set the planning framework. It will have CPO powers, to be confirmed by the Secretary of State, to acquire land within the new town area. The board of the development corporation has to be majority non local authority members. The emphasis, as with the old generation of new towns, is on delivery, this time however with an additional statutory focus on community participation and stewardship.

There has been a long campaign to update the 1981 Act to make it fit for purpose. The government has done a large part of the necessary work, and local authorities now have a powerful new mechanism to help deliver, and control, large scale development. There are some interesting future challenges and opportunities. How will future development corporations work alongside landowners and developers?  How will Local Development Orders be framed to secure consent for a masterplan in a way that can be properly environmentally assessed?  What approach will be taken to CPOs, where development corporations may want the security of early ownership of the entire new town area from the outset? An anticipated update to MHCLG guidance on CPOs may address this latter point.

The government has moved quickly and efficiently to put new powers in place. Local authorities now need to rise to the challenge.

Note: Dentons are advising the North Essex authorities who are promoting three new garden communities through their local plans, and are considering the possibility of a locally led new town development corporation as a delivery vehicle.

We consider a recent appeal decision for 601 houses at Overtown which confirms that unless Local Authorities keep local development plans up to date and demonstrate effective housing supply they will lose planning appeals, even on green belt land.

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Developers are often told that the CIL Regulations prevent ‘double dipping’ – where Community Infrastructure Levy (CIL) is spent on infrastructure for which financial contributions are also secured via Section 106 agreements (or, put the other way around, where S106 obligations are used for things the charging authority has said it will fund via CIL).

Not quite. In Oates v. Wealden District Council & Anor [2018] EWCA CIV 1304 the Court of Appeal confirmed that decision-makers may refuse planning permission for CIL-bearing schemes where highways impacts are sufficiently serious, even if the authority has previously said it will use CIL receipts for related highways works.

In Oates, the authority was considering an application for 390 homes on an unallocated, CIL-liable site which would have significant impacts on several junctions.

R123 Restrictions

Regulation 123 of the Community Infrastructure Levy Regulations 2010 does impose ‘double-dipping’ restrictions:

• planning obligations may not be a “reason for granting” permission where they secure funding or provision or infrastructure on a published list (including in most cases through “requiring a highway agreement”) – regulation 123(2)
• planning conditions are prohibited where they would require a highway agreement to fund or provide such infrastructure (or restrict development until a highways agreement is complete) – regulation 123(2A) also prohibits.

Be Wary

Developers should be very wary of the limitations of those controls. The authority’s R123 list in Oates identified highways works to the worst affected junctions as projects and types of infrastructure on which CIL would be spent.  The highway authority (County Council) objected to the application because critical improvement works were required to these junctions before development.  The impacts would be severe without guaranteed implementation and timing of the CIL-funded works. The  applicant resisted this on the basis that the R123 list meant that the necessary upgrades could “only be provided through the payment of a CIL contribution” and were not within the developer’s control or any proper restriction.  The County Council withdrew its objection on the strength of advice agreeing with that position. The LPA’s officer then reported this to committee.

The Claimant claimed that the misdirection on the effect of the CIL Regulations – wrongly assuming that a Grampian-type restriction on development until the upgrades were complete – rendered the consent unlawful.

No-Nonsense

The judgment is clear that the highway authority had failed to understand the “true scope of Regulation 123” – which does not “compel[…] the Local Authority to grant permission for a proposed development if, for whatever reason, that development is unacceptable in planning terms, or if it cannot be made acceptable either by a planning obligation, or by the imposition of conditions”.

The officer had directly ruled out a Grampian restriction on occupation until the mitigation works were complete, which would have been lawful.  Instead she had simply said nothing about it but had advised members the impact would be unlikely to be “severe” taking into account both build out rates and time for delivery of the infrastructure improvements funded by both CIL and other sources.  As such, that a restriction would be unjustified.

Look Both Ways

The judgment therefore underlines the need to:

• understand the general development cost imposed by CIL
• understand what is, genuinely, ‘necessary’ to make a scheme acceptable (bearing in mind the high bar set for the ‘severe’ impact threshold, for example, in relation to highways impact)
• review what assumptions the planning authority and the CIL charging authority have made when assessing the viability of combined planning burdens for a particular site.

If its CIL-stage or Local Plan stage assessments have assumed – in setting a high CIL rate or justifying planning burdens – that CIL will ‘replace’ some forms of scheme-specific mitigation costs then that will often create a legitimate starting point for avoiding the double dip.

If not, it is worth looking both ways on CIL.

The case of Peters v London Borough of Haringey (Haringey) provides welcome clarity over the extent of the local authorities powers to form limited liability partnerships (LLPs) for the delivery of regeneration projects carried out in partnership with the private sector.

Partnership approach

LLPs offer benefits:

• tax transparency (particularly for the private sector participant) in relation to corporation tax and VAT;
• governance (often a key concern for the public sector): the fact that LLP members don’t generally owe a fiduciary duty to the LLP can alleviate concerns over conflicts and other issues.

Haringey Development Vehicle

The case concerned the high profile procurement, by Haringey, of a joint venture partner to participate in the Haringey Development Vehicle (HDV).  The HDV was to have responsibility for the delivery of specific projects as well as the general management and exploitation of Haringey estate.   The various reports identified some key benefits from participating in the project including: (a) an estimated 6,400 new homes; (b) development returns of £275m, plus S106 and CIL payments; (c) £8m HDV investment into a social and economic programme and £20m Lendlease investment in a Social Impact Vehicle.  The HDV was formed as a LLP, with 50/50 control between Haringey and Lendlease.

Opposition

However, the HDV project faced fierce political opposition, one manifestation of which was the challenge by a former senior local government official in Haringey in relation to the lawfulness of the project on a number of grounds, including (the exclusive focus of this blog) the use of an LLP as the legal entity to deliver the project.

Haringey had relied upon Section 1 of the Localism Act 2011, which provides a general power of competence to “do anything that individuals generally may do“.  Section 1 of the Act is however qualified by Section 4(2), which states that “where, in exercise of the general power, a local authority does things for a commercial purpose, the authority must do them through a company“, with “company” being defined specifically as a company under the Companies Act 2006 (and not a partnership).

The Claimant was therefore arguing that, by using a LLP as opposed to a limited company, Haringey was acting unlawfully – but this was dependent on whether Haringey was undertaking the HDV project “for a commercial purpose”.

Commercial purposes?

In determining whether there was a commercial purpose the judge, Ouseley J, held that Section 4(2) of the Act is not intended to narrow the scope of pre-existing powers.  He also made clear that Lendlease’s purposes (which were clearly profit driven) were not relevant to the analysis; neither were those of the LLP itself – what was important was Haringey’s purposes.

And on that question Ouseley J was clear that the purposes were not commercial, and the challenge therefore failed.  The objective of the HDV project was for the achievement of “housing, employment and growth or regeneration objectives”.  He said “achieving a return is neither purpose or the activity of itself”.  The fact that profit may be a consequence of achieving best consideration on land disposals and of acting prudently did not mean that the Council was acting for a commercial purpose.  To the extent it was doing so, it could be said to be doing so in order to further its primary non-commercial purposes.

Relevance

For local authorities and developers alike the case provides helpful clarity on the lawfulness of using LLPs to deliver regeneration projects.  Although each case will need to be considered on its facts (including some analysis of the intentions of the authority), the case provides a very helpful sign-post toward what local government powers allow for.

Post script…

While the challenge failed at law, but the future for the HDV project itself is uncertain.

Following the judgment, the Labour leader who had originally promoted the HDV scheme was replaced and the Labour party (under new leadership) fought the May 2018 elections on a platform which included scrapping the HDV – illustrating that very often at local government level political support for a project can be as important as being legally “correct”.

The case illustrates that a claim can “succeed” in the broader sense of creating a pause in which political opposition may overcome a unpopular (but lawful) decision.  That should influence the circumstances in which delivery vehicles are deemed to be the appropriate mechanism for regeneration – sometimes a lower risk strategy will be to opt for an easier to understand and less legally contentious approach will be the right option.

As of July 2018, the precise status of the HDV is unclear, but the “Stop HDV” group continues to campaign against any kind of reanimation of the scheme.

Post post script

On 17 July 2018, Haringey Council finally decided to scrap the HDV project. 

Their stated reason was that the risk level had increased in the period since it initially entered the deal (a decision taken under the Council’s previous Labour leadership), although the political pressure to act was no doubt a significant contributory factor. The risks highlighted (and used to justify the decision) include those related to committing its commercial portfolio to the HDV, as well as the satisfaction of conditions and land for development.

According to press reports, Haringey Council have been threatened by Lendlease with a multimillion pound lawsuit for the loss of profit from the project. It has also been revealed that the Council is obligated to pay £500,000 to cover the costs of Lendlease relating to HDV. The Council also faces cost of around £2.5m spent on setting up the HDV.

The approach to land value and the application of planning policy were brought into sharp focus by an Inspector’s decision to dismiss the developer’s appeal against refusal of permission on the grounds that the ‘maximum reasonable level’ of affordable housing had not been secured. The developer had proposed residential redevelopment of a surplus military site where it was the successful bidder. Holgate, J’s judgment – dismissing the challenge to that decision under Section 288 of the Town and Country Planning Act 1990 – in Parkhurst Road Ltd v Secretary of State for Communities And Local Government & Anor [2018] EWHC 991 (Admin) confirms the importance of understanding how land value should reflect planning policy requirements.

The developer relied on nearby sales data to justify its land cost as at the market value for the site, limiting its affordable provision at ten percent. The Inspector accepted the authority’s approach, starting with the site’s low established use value (EUV) and applying a substantial premium (EUV Plus), to reach an overall benchmark value at which 34% provision was feasible.

In the previous (2015) appeal, an Inspector’s finding that the developer’s benchmark land value was broadly reasonable in light of ‘market signals’ (competing bids and comparables) resulted in a threat of legal challenge by the authority and a letter from the Government acknowledging that the Planning Practice Guidance “unambiguous policy position” is “in all cases land or site value should reflect policy requirements and planning obligations…”.

The developer ran its new appeal case on the basis that using EUV Plus was inappropriate where the EUV was negligible. The Inspector rejected its evidence on market values, on the basis of the weakness of the comparables used (being unadjusted for variations in policy compliance and EUV). He refused to accept “a market valuation which does not, in my view, adequately demonstrate proper consideration of, or give adequate effect to, the guidance in PPG or the requirements of the development plan“. In line with the authority’s case, he adopted EUV Plus as a starting point, then having regard to the market as a relevant, not determining factor.  The decision letter included a statement that the authority was promoting an EUV Plus method of valuation.

The developer challenged the decision under Section 288 on various grounds, including that the Inspector’s misunderstanding of the authority’s was partly responsible for rejecting the developer’s position that a purely market value approach was “the only reasonable means by which to establish the land value” given the low EUV. It also claimed that the Inspector’s decision was vitiated by accepting a (flawed) technical ‘fix’ for comparing land values relied on by the authority’s expert.

Holgate, J dismissed these two grounds: firstly, the Inspector had understood the authority’s approach correctly (establishing a site value and then re-expressing it as EUV plus a premium to cross-check the reasonableness of the site value indicated by comparables); secondly, the Inspector had erred on the technical fix but his “wholesale and robust rejection” of the appellant’s valuation case and interpretation of development plan policy did not rely on – “had nothing to do with”  – that point.

The judgment clearly explains the meaning of the PPG and the upholds the way the Inspector applied it. There is no wider or new principle, but it is nonetheless helpfully clear that in the current PPG regime:

(1) the PPG addresses the problem of ‘circularity’ – where residual land valuation using land price is based on downgrading policy expectations erode policy – by requiring site value to respect policy expectation, competitive return to willing owners and evidenced market value at the same time;

(2) comparable evidence is one helpful way to calibrate reasonable land value expectation, but may often require adjustment to be fit for purpose (including, for example, to deal with high existing or alternative use values and policy non-compliance).  The more adjustment needed – and the harder to do – the less the weight that may be applied (40);

(3) reasonable behaviour matters – proper due diligence and analysis of actual demand are key elements of the reasonable owner (citing Trocette Property Co Ltd v Greater London Council (1974) 28 P & CR and Inland Revenue Commissioners v Gray [1994] STC 360);

(4) policy requirements (depending on how they are expressed) may put the onus of proof on the applicant. An Inspector may reject that party’s case as lacking sufficient cogency to satisfy the policy (paragraph 54, applying Vicarage Gate Limited v First Secretary of State [2007] EWHC 768 (Admin));

(5) planning by numbers is tempting but dangerous – “the NPPG recognises that it may not be proper” to “compromise policy requirements” even where there is a viability constraint;

(6) authorities need to be careful too: using EUV Plus as a rule rather than part of an analysis “disregards levels of market value arrived at quite properly in arm’s length transactions and consistent with the correct application of planning policies and sound valuation principles” (146).  “Local policy statements” may cross the line in this way “especially where the document has not been subjected to independent statutory examination prior to adoption“. This is rife in practice, with Supplementary Guidance masquerading as development plan policy;

(7) planning appeal decisions should be taken with a pinch of salt – they are fact specific, cannot establish or change policy, consume “a disproportionate amount of time and may distract parties” from actually getting their own evidence right.

Both the appeal decision and the judgment underline the need to avoid land value expectation becoming self-referential. The decision is a reminder of the need to critically examine evidence of comparable values to weed out those which failed to comply with policy in the first place (i.e. are not truly comparable) and of the risks when bidding for land with low existing value of being too led by future scheme, rather than underlying use, value.

The judgment also underlines the critical importance of properly testing the effect of policies at examination in public if they are to be legitimately treated as the irreducible starting point. Practitioners should take heed on both fronts and hope that the Government does not sweep away too much of the current Guidance, on which there is now judicial clarity.

(This article was originally published in Estates Gazette on 14 May 2018)

ECJ’s preliminary ruling in the People Over Wind/ Sweetman case means that ‘mitigation measures’ should not longer be taken into account when screening for ‘any significant effects’ on SAC/ SPA for plans and projects (for the purpose of deciding whether Appropriate Assessment is needed to establish if the effects would be likely to have an adverse effect on the integrity of the designated asset).

On the face of it, it means, for applications where significant effects on SAC/SPA are likely (i.e. applying the Waddenzee precautionary approach, the risk cannot be definitively ruled out) that Appropriate Assessment will be required so that mitigation measures are evaluated in more detail.

An End To Sense?

The People Over Wind ruling is that “…it is not appropriate, at the screening stage, to take account of the measures intended to avoid or reduce the harmful effects of the plan or project on that site” (emphasis added).

This cuts across the domestic approach adopted in the Hart District Council case in 2008, which has provided a sensible basis for addressing effects on Natura 2k sites.  Having regard to mitigation measures in screening out Appropriate Assessment for planning applications and plans has been commonplace common sense, treating the Habitats Directive as a “aid to effective environmental decision making, not a legal obstacle course” (Sullivan, J as he was in Hart).

The reasoning in the ruling (paragraphs 35 and 36) does not withstand much scrutiny and is really Law Over Sense.  To make things worse, it is unclear about what “mitigating measures” are for these purposes. It simply refers to them as measures “intended to avoid or reduce the harmful effects of the envisaged project on the site concerned“.

Planning Inspectorate View

In-built mitigation by design is surely not within its ambit? The Planning Inspectorate’s Note 05/2018 takes a more hardline view: “Competent authorities cannot take account of any integrated or additional avoidance or reduction measures when considering at the HRA screening stage whether the plan or project is likely to have an adverse effect on a European Site.  The screening stage must be undertaken on a precautionary basis without regard to any proposed integrated or additional avoidance or reduction measures“.

This is gold plating – the ECJ ruling does not provide any express basis for the underlined element. The benefit of the environmental assessment process, noted in Hart, is to get thinking about reducing effects at the outset of scheme design.  Trying to split out anything that is ‘integrated’ into the scheme design, for example, is horribly artificial and a terrible waste of time.

The effects of this are being felt as LPAs suspend development management decisions and Local Plans are suspended.

Let’s Be Sensible

Outcomes: Where the finding based on mitigation would previously have been a negative screening (because of no likelihood of any significant effect at all, with that mitigation), the lesser threshold of no adverse effect on the integrity of the SPA at the full AA stage should be satisfied.  The additional process will probably yield more information about mitigation measures but no change of outcome (subject to the point noted below).

Government will need to provide leadership to ensure we do not simply end up with a deluge of AA reports concluding that there is no significant effect with mitigation. That would be a truly pointless exercise.

Steps: It would be sensible for PINS and Government to be clear, ASAP, that:

• Things authorised by the development consent should be regarded as integral components of the scheme and so not mitigation for its effects for the purposes of the ECJ ruling.
• Where AA is now unavoidable, a standardised toolkit will be available to allow very short AA reports to be prepared that allow, for example, the analysis of the effect of off-site SANG contributions to be fully standardised (using the AA analysis conducted when justifying the SANG contributions in the first place).  This is crucial to avoid the ruling becoming another source of time-soak, cost and distraction in the already bloated world of planning assessments.
• The current block (in NPPF119) on applying the NPPF14 ’tilted balance’ is going to be revisited in the soon-to-be-revised NPPF to avoid an unintended outcome.  If AA concludes that there is no likely significant effect with mitigation (as distinct from concluding that there will be a significant effect short of adversely effecting the integrity of the SPA), the presumption in favour should apply.

We consider the main proposed changes in the draft NPPF and whether these will be sufficient to deal with the housing crisis. On 5 March 2018 the Ministry of Housing, Communities and Local Government published a revised text of the National Planning Policy Framework (the draft NPPF) alongside a raft of other supporting documents, government responses and further  consultations, including the revised Planning Practice Guidance text. The government has said that it intends to publish the final version of the NPPF ‘before the summer’, indicating that few changes are expected to be made as a result of the consultation.

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This article was first published in Property Law Journal (May 2018) and is also available at www.lawjournals.co.uk