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How to value a ransom strip?

Published: 09/04/2020

Throughout their careers, many developers, landowners and valuers come across a "ransom strip". Ransom strips are not the most common and straightforward type of land to value. It is a broad topic with many different angles and raises much controversy over the methodology to follow when establishing its value.

Before we proceed to the analysis of the possible methods to value this type of property, it is useful to provide a short definition. A ransom strip is a parcel of land needed to access a property or a site in order to unlock its development opportunity. This could be a piece of land required for access to development with insufficient rights or without any rights at all, land required for services or perhaps for a building to be developed.

Although there is not a particular framework or guidance from the RICS or other regulatory bodies on how to value ransom strips, the starting point for landowners, developers and valuers is usually the case law of Stokes v Cambridge Corporation [1961] 180 E.G. 839. The decision made by the two Chartered Surveyors of the Tribunal was that the owner of the strip is entitled to one-third of the increase in the value of the adjacent land just for providing access to the development. This decision has created a strong precedent which used in many other legal cases, valuations and negotiations.

To illustrate this, if a developers land is initially worth £1m and the value of a development site is £7m (having deducted developer's profit and costs of roads, sewers, fencing, consents and contingencies), the valuation of a ransom strip would be £2m (one-third of £6m).

This legal case has provided some solid grounds for future valuations. However, there are some examples that a different methodology has been used. In particular, there are legal cases where the value of the ransom strips has been calculated using a completely different method or examples where the two parties have come to an agreement at a different level and not this one-third of the uplift as per Stokes v Cambridge. For instance, the value of the ransom strips in Batchelor v Kent County Council [1992] 1 EGLR 217 and Ozanne and ors v Hertfordshire County Council [1989] 43 E.G. 182 were 50% of the uplift. 

In addition, the recent case of Persimmon Homes Limited v Hillier and ors [2018] EWHC 221 (Ch) highlights the significance of planning consent when valuing a ransom strip. The court found it appropriate to apply a discount for planning risk to the purchase price, as the site was acquired without planning. This was done to account for the risk that the claimant would have taken in purchasing the land without the security of knowing that it would be able to develop the site.

In the aforementioned cases, the Tribunal has adopted thinking when making their decision. More specifically, the surveyors have taken into consideration factors such as the possibility of the existence of a different access point or the risk of acquiring the strip without having planning consent for the proposed development. There is no doubt that these factors affect the property value, and it might be reasonable to be taken into consideration when valuing the ransom strip.

In the recent case of Persimmon Homes Limited v Hillier and ors [2018] EWHC 221 (Ch), the court considered the significance of planning permission on the valuation of a ransom strip. One of the questions before the court was what the claimant would have paid for a ransom strip in October 2012. At that time, planning permission for any development works had not yet been granted, so the court found it appropriate to apply a planning risk discount to the purchase price, to account for the risk that the claimant would have taken in purchasing the land without the security of knowing that it would be able to develop the site – in other words, to take account of the anticipated value of the land being lower than its eventual development value.

Therefore, there is no rule or an absolute answer on how to approach this kind of valuation. Despite the existing legal context, there is no 'one size fits all' approach with a number of factors that need to be taken into account. 

However, the critical point to remember is, as this is not a statutory valuation, the outcome will be down to negotiations between the buyer and the seller. The ransom strip owner has a limited number of buyers (or in some cases only the owner of the adjacent land), while the developer won't be able to deliver a project without the ransom strip in question. Therefore, it is essential that both parties release the value of their assets by agreeing on a price acceptable for both.

If you need advice on a ransom strip valuation please speak to our Expert Witness Surveyor or call us on 0207 749 1040.