Article of the Month -
Private Compulsory Acquisition and the Public Interest Requirement
Thomas KALBRO, Sweden
This article in .pdf-format.
A strong connection exists between, on the one hand, land use in an area
and, on the other hand, the structure of ownership and properties. Because
land use is constantly changing in a dynamic society, the structure of
ownership and properties also has to be adapted to new conditions.
Adjustments of ownership, rights and property division can often be
achieved on a voluntary basis. In other words, properties and rights can be
transferred through market transactions. But property owners can also be
made, subject to certain conditions, to relinquish land and property rights
against their own wishes. One basic precondition of this kind for compelling
a property owner to surrender his property or accept restrictions on his use
of the land is that the compulsory acquisition must be for a purpose which
is in the public interest.
Some decades the question of public interests presented less of a
problem in many countries. Expropriation, for the most part, was carried out
by ”the public”, meaning national or local government, and the involvement
of public interests did not, normally, need to be challenged. It went more
or less without saying that when public authorities had to acquire land,
this was a matter of public interest.
A more complicated scene has evolved, however, during the past twenty
years or so, due to the privatisation of traditionally public undertakings.
For example, former State Bodies for telecommunications, with a monopoly of
telecommunication services, has now become limited companies operating for
profit. Private consortia are developing new generations of mobile
Given this transfer of formerly public tasks to the private sector – and
the need of land for different purposes – the question of private compulsory
acquisition demands consideration. This being so, how is the ”public
interest” requirement to be met in order for compulsory acquisition to be
possible? That is the question which this essay attempts to shed light on.¹
¹ The paper is based on an
article published in Social Strategies, Vol. 38. 2004.
2. A LEGAL FOUNDATION OF COMPULSORY ACQUISITION
Forcing someone to surrender land against their will is of course a
powerful incursion on the individual right of ownership. Accordingly, there
have to be very good reasons for building up legislation sanctioning this
kind of coercion. In the European Convention one fundamental legal
prerequisite is that compulsory acquisition may only be prompted by purposes
which are in the public interest.2
Every natural or legal person is entitled to the peaceful enjoyment of
his possessions. No one shall be deprived of his possessions except in the
public interest and subject to the conditions provided for by law and by
general principles of international law.
However, the European Convention does not specify more exactly who is
entitled to acquire property by compulsory purchase. The same goes for the
amount of compensation payable.
² Or more correctly. the
European Convention for the Protection Human Rights and Fundamental
Protocol March 20th 1952, Article 1.
3. THE PUBLIC INTEREST – JUSTIFICATIONS FOR COMPULSORY ACQUISITION?
Changes of land use, property subdivision, ownership and rights can often
be achieved by voluntary agreement, based on negotiations between buyer and
seller. But, as we have now seen, property owners can be forced to surrender
property and rights against their wishes. Thus it is legally possible for a
buyer to acquire properties/rights at a lower price than would probably have
resulted from free negotiations with the seller. Fundamentally, then, the
coercive rules are related to the amount of compensation to be paid.
This price regulation, then, presupposes the existence of a public interest,
the more detailed implications of which have been defined through
legislation and case law in different countries. The question has also been
discussed, however, in the academic discipline commonly termed “law and
economics”.3 We shall now turn to
consider the main outlines of that discussion.
The siting of many facilities – roads, railways and utilities, for
example – is often more or less confined to certain places. In other words,
certain specified areas of land are needed for the purpose, and so the buyer
cannot approach any property owner whatsoever with a view to acquiring the
necessary land on the open market. The seller, accordingly, has a monopoly
status in relation to the buyer.
If, then, compulsory purchase were not possible, these measures could be
prevented by the owner refusing to part with his land. The owner of
strategically situated land could frustrate measures which are desirable
from a community viewpoint. In other words, the owner could veto the
implementation of a planned use of the land. One argument in favour of
compulsory purchase legislation, then, is that it prevents the individual
property owner from acquiring such power.
In the situation described above, it is also conceivable that the
property owner is not prepared to go to the extent of refusing to sell on
any account. But in order to agree to a sale, the owner, conscious of
occupying a monopolistic situation, demands a very high, ”unreason-able”,
price. A second argument in favour of legislation, then, is that it prevents
a property owner from obtaining monopolistic profits by owning land which
happens to occupy a strategic position.4
So the main reason for sanctioning compulsory purchase is the buyer’s need
of certain specified areas of land, and the concomitant risk of his having
to pay a higher price than he would if there were more potential sellers,
and also of the cost of negotiations being unnecessarily high.
The buyer’s need of a certain particular area of land is commonly
regarded as a necessary precondition for the justifiability of compulsory
purchase, but it is not the sole precondition. The purpose of the
acquisition has to be rated, generally speaking, “important”. If, for
example, I wish to add a few square metres of my neighbour’s property to my
front lawn, this definitely requires a particular area of land, but the
requirement will not justify compulsory purchase, because my front lawn can
hardly be termed an important purpose. In order for a purpose to be
important from a public point of view, the benefits of the
purpose/acquisition have to be significant to a larger group of people, as
is normally the case, for example, with common facilities like roads,
utilities and green spaces.5
Finally, in order to legitimate compulsory acquisition, the purpose with
the purchase have to be “profitable” in the view of society, i.e. the value
of the new land-uses must exceed the value of the existing use.
However, these three criteria say nothing about the form of activity
(public authority, private limited company etc.) conducted by the purchasing
party. It is the activity itself and the purpose of the acquisition that
This problem can be instanced with a topical activity in Sweden, namely the
development of the 3G (Third Generation) mobile telephony network, which
poses the issue of compulsory purchase.
In December 2000 the National Post and Telecom Agency, PTS, decided to
award UMTS licences to four private enterprises: Europolitan, HI3G, Orange
and Tele2. All four applicants made commitments for coverage of at least
99.98 per cent of the population of Sweden as early as the end of year 2003.
This would mean the erection of large numbers of masts throughout the
country, an undertaking for which, one way or another, the four companies
would have to obtain the necessary rights.
Opinions may differ among the general public concerning the usefulness of
being able to communicate speech and data by mobile telephone, but most
people would probably agree on the whole that this is an “important”
activity and “profitable” from a societal point of view. Thus two
preconditions for compulsory purchase for the purpose of erecting mobile
telephony masts are satisfied.
On the other hand it is a debatable point whether the masts really have
to be sited in certain particular areas of land. If the number of masts
involved is limited, the answer will clearly be negative, because then there
would be many alternative locations for these few masts. Such a situation of
choice cannot justify the right to acquire land (or acquire the right to
erect a mast) by compulsory purchase from one landowner.
In actual fact, however, we are talking about a continuous system of many
masts, not just a few, and the argument goes that, once the siting of one
mast has been determined, this will affect the siting of other masts as well
(see figure 1). And so, for the construction of whole system, each
individual mast will in practice have to be sited within a limited area
(offering suitable access, topography etc.). In this case all public
interest requirements would be ful-filled.
Figure 1 Radio planning and placement of radio base stations. (Source:
NCC Sverige AB, 2002).
Se e.g. Werin (1978) och Miceli & Segerson (1999).
In the terminology of law and economics, this
is commonly referred to as the hold-out problem, in the sense
of the seller being able to ”hold out” for a higher price in his
negotiations with the buyer.
The monopoly situation in which the seller thus finds himself is liable,
furthermore, to entail protracted
negotiations etc., i.e. completion of the purchase may entail high
transaction costs. To appreciate this point,
we need only imagine a negotiating procedure connected with the construction
of a motorway or railway
traversing a large number of properties. In cases of this kind, the
negotiating costs could well be prohibitive.
In certain respects, a property owner’s compensation demands also may be
deemed “excessive”, even if
the asking price is not based on the owner being in a monopolistic position.
To rectify this situation, the law
may prescribe a rate of compensation below the price which the buyer would
have had to pay in an entirely
voluntary transaction. In other words, the law seeks to favour the buyer,
e.g. for equity reasons. Thus another
purpose of compulsory purchase legislation is that of reallocating wealth
from seller to the buyer.
See e.g. Epstein (1985)
4. THE LEVEL OF COMPENSATION?
If compulsory purchase is to be allowed, then from a strictly legal point
of view it has of course to be determined whether or not the purpose of the
acquisition is in the public interest. There are no two ways about this: the
answer has to be either Yes or No. On closer inspection, though, the problem
is less straightforward. There are degrees of strength, even where public
interest is concerned, which leads Epstein (1985), for example, to argue
that the degree of public interest can have a bearing on the amount of
compensation which should be paid. That is to say, the lower the degree of
public interest, the higher the compensation. This question will be dealt
with in the section which now follows.
As a starting point we can ask ourselves; what will the price be if a
property is sold voluntarily?
4.1 The Price in Voluntary Transactions?
In voluntary transactions the following observations can be made:
In order for the sale of a property to materialise in the first place,
buyer and seller must value the prop-erty differently. In order for the
seller to be prepared to part with the property, the buyer must pay a price
at least equalling the value put on it by the seller. At the same time, of
course, the buyer is not prepared to pay more than the value which he
himself puts on the property. In other words, there must be an agreement on
price between the values put on the property by seller and buyer.
– The profit resulting from a voluntary sale can be seen as the
difference between the values put on the property by the buyer and seller.
If the price comes close to the seller’s valuation, the buyer will have a
bigger share of the profit. Conversely, the closer the price comes to the
buyer’s valuation, i.e. the higher the price, the greater the seller’s share
of the profit will be (see Figure 2).
Figure 2 Profit-sharing and voluntary transactions (Source: Kalbro and
The same argument can also be applied to parts of a property which are
transferred to another property (or to an easement created in one property
in favour of another). In order for a voluntary transfer to take place, the
land must be differently valued by the parties respectively acquiring and
parting with the land. And the price must come somewhere in between those
This is a theoretical argument. The question is how the price is
determined and how the profit is apportioned in actual practice. Here it has
to be admitted that our knowledge of price formation in different situations
is limited, i.e. there is great uncertainty regarding the appropriate level
of payment. Some light has been shed on this problem by Kalbro and Lind
(2007) in bargaining experiments. The experiments indicate an interesting
combination of ethical principles and self-interest. The participants tended
to argue in terms of principles of fairness, but they chose the principles
that furthered their own interest.
4.2 Compensation for Compulsory Acquisition
The basic idea behind the rules of compensation is, in many countries,
for the property owner forced to surrender land, to be in the same economic
position as if the compulsory purchase had never happened. The property
owner shall be compensated for the damage he suffers, and in this sense
compensation can be said to be based on a principle of indemnification.
The main rule for the compensation, is normally, to correspond to the market
value of the property, i.e. the price which it would fetch in the open
market.6 When only part of the property
is affected by compulsory purchase, the compensation must equal the loss of
market value which the compulsory purchase entails.
Besides the principle of compensation based on the damage of the seller´s
property, some countries7, apply more
generous compensation principles in some cases when private compulsory
acquisition is at hand.
In these cases seller/conveyor is to be compensated for, at least, the
reduction of market value. But in addition, when fixing the compensation,
“reasonable allowance” shall also be made for the value of the land to the
buyer. In other words, the compensation paid to the seller must correspond
to compensation for the injury and to a share of the profit which the
measure implies. This rule of compensation, then, is more favourable to the
seller, the reason being that in private compulsory purchase it has not been
considered fair to favour the buyer in the same way as happens under
“normal” expropriation by public bodies.
The difference between the compensation principles
can be illustrated in the figure below.
Figure 3 Two different compensation principles.
In connection with the issue of private compulsory acquisition Epstein
(1985) argues roughly as follows. If the profit from a compulsory
acquisition accrues to many parties, i.e. if the purpose of the acquisition
is to cater to a need on the part of many people, it can be reasonable for
the profit to accrue to the acquirer. This means that the person
surrendering land shall only be compensated for the damage occurring. This
could be instanced with the land acquisitions which have to be made for the
construction of state-funded public highways. If on the other hand the
profit concerns a very limited group, it ought reasonably to be shared
between them. This could be instanced with a boundary adjustment between two
properties in order to achieve better property subdivision.
Thus, different levels of compensation may be needed, depending on the
situation. In practice, though, the crunch issue is when compensation must
indemnify the property owner for the damage occurring and in what situations
profit-sharing is called for. One argument pro-pounded, in the light of
Swedish example presented above, is that profit-sharing must accompany
expropriation for a purpose involving commercial profitability requirements.
This applies, for example, to the acquisitions made by private, commercial
undertakings responsible for developing mobile telephone networks.
6 Definition of the
„market value” is not without its problems, but space will not allow us to
consider this any
further. Nor will space permit us to describe valuation methods which can be
used for estimating market
value in different situations. See instead Norell (2007)
If compensation with the loss of market value does not fully cover the
economic injury to the property
owner, compensation can also be paid for “other damages”. Compensation for
such damages may come into
question, for example, when a property owner has to move house or close down
a business conducted on the
E.g. Sweden and Finland.
5. CONCLUDING COMMENTS
The changes occurring in many countries during the past decade or so have
entailed the transfer of traditionally public responsibility for public
utilities to private, sometimes profit-based undertakings. This highlights a
number of important questions. Are these undertakings to have the same
powers of compulsory land purchase as public authorities? If so, there is
cause to consider whether the compensation paid to the party surrendering
land should be more generous if the expropriating body is a private business
undertaking operating for profit.
Where the first of these questions is concerned, I have in this paper
discussed the fundamental precondition of compulsory acquisition, namely the
existence of a “public interest”. The definition of public interest in
connection with compulsory purchase can be summed up in two criteria, both
of which have to be satisfied:
– The purpose of the acquisition must be “important” and “profitable”.
– The acquirer must need a certain specific area of land (and accordingly
not be in a position to approach any property owner whatsoever in the free
With this way of looking at things, the prime concern is not who acquires
the land. The criteria can be satisfied regardless of whether it is the
public or the private sector that needs land for a certain purpose. And
conversely, the criteria are not necessarily met simply because land is
needed by a public authority. Thus in the case of privately operated mobile
telephony masts, compulsory acquisition can be justifiable by the importance
of the purpose and by the areas where the masts can be erected being, in
principle, very limited (even if, within certain limits, there may be
various siting options).
Once it has been established that private compulsory purchase is
permissible, it remains to be decided what compensation should be paid. As
stated earlier, two main alternatives are conceivable. One of them is for
the property owner affected to be compensated for the damage incurred. The
other is fort the property owner concerned also to have a share in the
profit which the measure entails.
When coercive rules are used by public authorities, compensation is based
on the person surrendering land being compensated exclusively for the damage
which occurs. Is this also a reasonable principle of compensation in cases
of private compulsory purchase? This has been questioned, especially when
the acquirer is a private undertaking operating for profit, as for example
in the case of the companies now constructing the mobile telephony network.
Should there not instead be a sharing of profit between buyer and seller?8
As mentioned earlier, a Government Commission is currently studying this
issue. It will be interesting so see the conclusions arrived at.
In Sweden this question is highly relevant, since a Government Commission,
is reviewing the compensation
rules in order too see if the present legislation meet the demands of a
- Epstein, R. A. 1985. Takings: Private Property and the Power of
Eminent Domain. Harvard University Press. Cambridge MA.
- Fischel, W. A. 1995. Regulatory Takings: Law, Economics and
Politics. Harvard University Press. Cambridge MA.
- Jaffe, A.J., & Louziotis, D. 1996. Property Rights and Economic
Efficiency: A Survey of In-stitutional Factors. Journal of Real Estate
Literature, Volume 4, Number 2, July 1996.
- Kalbro, T., & Lind, H. 2007. Compulsory Purchase – Reasonable and
Fair Compensation. Nordic Journal of Surveing and Real Estate Research,
Volume 4, Number 1, 2007.
- Kalbro, T. & Sjödin, E. 1993. Ersättning vid fastighetsreglering
(Compensation for Realloment). Ju¬ristförlaget. Stockholm.
- Norell, L. 2007. Is the market value a fair and objective measure
for determining compensation for compulsory acquisition of land? Paper
to the FIG Helsinki Seminar on Compulsory Purchase, 6-8 September, 2007.
- Miceli, T. J., & Segerson, K. 1999. Takings. Department of
Economics, University of Connecticut.
- Michelman, F. I. 1967. Property, utility and fairness: Comments on
the ethical foundations of „Just Compensation” law. Harvard Law Review
(vol. 80, 1967, s. 1165-1258).
- Snare, F. 1972. The Concept of Property. American Philosophical
Quarterly 9 (April), 200-206.
- Werin, L. 1978. Expropriation - en studie i lagstiftningsmotiv och
er¬sätt¬ningsrättsliga grundprinciper (Expropriation – Principles for
Compensation). Svensk Juristtidning, (no. 6, p. 81-120).
Prof. Dr. Thomas Kalbro
Real Estate Planning and Land Law
School of Architecture and Urban Design
Royal Institute of Technology
Brinellvägen 1, 1tr
100 44 Stockholm
Tel. + 46 8 790 86 15
Fax: + 46 8 790 73 67